BSP hikes interest rate to 2.25%

·4 min read

THE Monetary Board (MB) decided to raise the interest rate on the Bangko Sentral ng Pilipinas’ (BSP) overnight reverse repurchase facility by 25 basis points (bps) from two percent to 2.25 percent, effective Friday, May 20, 2022.

Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 1.75 percent and 2.75 percent, respectively.

“The Monetary Board noted that the strong rebound in domestic economic activity and labor market conditions during the first quarter of 2022 provides scope for the BSP to continue rolling back its pandemic-induced interventions, consistent with its exit strategy from monetary accommodation,” the BSP said in a statement.

In deciding to raise the policy interest rate, the MB noted that “the latest baseline forecasts have further shifted higher since the previous monetary policy meeting in March, indicating that elevated inflation pressures could persist over the policy horizon.”

Average inflation is likely to breach the upper end of the two to four percent target range in 2022 at 4.6 percent, while the forecast for 2023 has edged closer to the upper end of the target band at 3.9 percent, the MB said during its meeting Friday.

The Philippine economy grew 8.3 percent in the first quarter, beating expectations. But inflation also hit 4.9 percent in April, above the government’s forecast of two to four percent.

“The balance of risks to the inflation outlook now leans toward the upside for both 2022 and 2023, with upside pressures emanating from the potential impact of higher oil prices, including on transport fares, as well as the continued shortage in domestic pork and fish supply,” the MB said.

Meanwhile, the downside risks, according to MB are linked mainly to the potential impact of a weaker-than-expected global economic recovery amid the lingering threat of Covid-19 infections, heightened geopolitical tensions, and a tightening of global financial conditions. The MB also observed the emergence of second-round effects, including the higher-than-expected adjustment in minimum wages in some regions.

“Given these considerations, the Monetary Board believes that a timely increase in the BSP’s policy interest rate will help arrest further second-round effects and temper the buildup in inflation expectations,” the MB said.

“As the economic recovery continues to gain traction, the BSP shall proceed with its plans for the continued gradual withdrawal of its extraordinary liquidity interventions and the start of the normalization of its monetary policy settings,” it added.

Ill-timed

Sought for comments, Steven Yu, past president of Mandaue Chamber of Commerce and Industry, said the hike in interest rate is ill-timed and will affect business activities.

“The earlier hike in interest rates will dampen business activities and temper consumer spendings. While it is meant to manage inflation, it will also slow down the economic activities, and set back the recovery of the business sector from the effects of the Covid pandemic, Typhoon Odette and geopolitical factors related to the Russia-Ukraine war. The increase is ill-timed and will pressure the micro, small and medium enterprises’ (MSMEs) road to recovery and survival,” Yu said.

Yu added that the reopening of the economy is “not sufficient to treat the deep wounds of the pandemic and the exceptionally rising costs of inputs due to the war in Ukraine.”

“The MSMEs will feel extreme pressure and pain. I hope they will not follow thru with another increase in the next quarters,”

he said.

Meanwhile, BPI lead economist Jun Neri in a statement said “the policy rate in this meeting has mitigated the risks that might have worsened without any adjustments in monetary policy.”

“The possibility of bigger rate hikes and intermeeting hikes would have increased if the BSP did not hike on Thursday. With the Fed likely to hike by 100 bps in the next two months, the differential of the Fed and BSP policy rates by end of July would be 50 bps assuming the BSP will only start hiking in June,” he said.

Moreover, Neri said inflationary pressures continue to build up not only in the Philippines, but also in other parts of the world.

He warned that “oil prices may go up again in the coming months, especially if the European Union decides to implement an oil embargo against Russia. Countries will be competing for other sources of oil in this scenario and prices will most likely soar. The Peso, on the other hand, is expected to weaken further in the coming months considering the surge in import demand.”

“Considering these risks, we now expect at least 100 bp hikes from the BSP this year from 75 bps previously. Despite this, we believe the economy has enough cushion in case the BSP decides to hike its policy rate further. Even with a 100 bps rate hike this year, the policy rate will still be below historical and pre-pandemic levels,” he said.

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