Philippine central bank hikes interest rates anew as inflation stays elevated

SINGAPORE (ICIS)–The Philippines’ central bank hiked its policy interest rates by 25 basis points on Thursday with inflation expected to remain elevated and projected to average higher than the target this year.

• Full-year inflation average projected at 6.0%
• February inflation dips but remains above 8.0%
• 25bps rate hike likely in May before pause

Effective 24 March, the interest rates at its overnight reverse repurchase facility will be 6.25%, the Bangko Sentral ng Pilipinas (BSP) said in a statement.

The decision came after the Federal Reserve issued a similar increase in its benchmark interest rates despite recent bank failures in the US.

Current conditions “warranted a continuation of monetary tightening to anchor inflation expectations,” the BSP said, adding that it expects 2023 inflation to average 6.0%, above the 2.0-4.0% target range, before falling to an average of 2.9% in 2024.

“The effect of supply shortages on domestic food prices remains a concern, while the potential impact of higher transport fares, increasing electricity rates, as well as above-average wage adjustments in 2023 point to the broader-based nature of price pressures,” the BSP stated.

The central bank noted that it may not be the end of its monetary tightening cycle.

“Further policy tightening will also preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in advanced economies,” it said.

Consumer inflation in February stood at 8.6%, down from 8.7% in the previous month and dipping for the first time in six months.

“We think the slowdown in inflation was a major factor in the BSP’s decision to ease the pace of tightening,” said Makoto Tsuchiya, assistant economist, at the research firm Oxford Economics in a note.

In previous monetary policy meetings, the BSP had been raising interest rates by 50bps.

“We expect the BSP to raise the policy rate again by 25bps at its May meeting, before holding the rate at that level throughout the year,” Tsuchiya said.

Barring any supply shock, inflation in the Philippines should trend down.

“However, risk of further/bigger hikes cannot be ruled out if the peso depreciates a lot given ongoing external pressures,” the economist said.

Meanwhile, the BSP is keeping a “watchful eye over developments in the international banking industry,” even as it assessed the local banking system as “resilient to evolving market conditions.”

Focus article by Pearl Bantillo

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