Starting today (August 19), the interest rate on the Bangko Sentral ng Pilipinas' overnight reverse repurchase rate facility has been raised by another 50 basis points (BPS) to 3.75 percent following its tracking of the inflation rate seen to hit 5.4 percent.
Photo Insert: The rise in interest rates is seen to temper the inflation spike that arose from the Ukraine crisis that saw energy and food prices rise.
That compares with the 2-4 percent target range of the BSP, which is mandated to ensure price stability. The rise in interest rates is seen to temper the inflation spike that arose from the Ukraine crisis that saw energy and food prices rise.
The interest rate hike, coming just after a surprise 75 basis point rise last month, was made during the policy meeting of the Monetary Board. Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 3.25 percent and 4.25 percent, respectively.
The BSP’s latest baseline forecasts have shifted higher for 2022, with average inflation projected to breach the upper end of the 2-4 percent target range at 5.4 percent.
While the forecasts for 2023 and 2024 have declined to 4.0 percent and 3.2 percent, respectively, the inflation target remains at risk over the policy horizon owing to broadening price pressures.
Elevated inflation expectations likewise highlight the risk of further second-round effects.
Upside risks also continue to dominate the inflation outlook up to 2023 due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases, the BSP said.
Meanwhile, the impact of a weaker-than-expected global economic recovery, as well as the resurgence of local COVID-19 infections, continue to be the main downside risks to the outlook.
At the same time, despite some moderation in economic activity in recent months, overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit.
For these reasons, the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon.
The favorable growth outcome in the first half of the year also gives the BSP the flexibility to act against inflation pressures while allowing domestic demand to sustain its recovery momentum amid prevailing headwinds.
The Monetary Board also continues to urge timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices.
The BSP reassures the public of its commitment and readiness to take all necessary actions to steer inflation towards a target-consistent path over the medium term in keeping with its price and financial stability mandates.