BSP shocks up 75 basis points

Bangko Sentral ng Pilipinas (BSP) shocked the financial market on Thursday by announcing an aggressive 75 basis point off-cycle interest rate hike in an attempt to contain consumer price inflation.

The Monetary Board, which sets policy, raised rates on central bank loans, deposits, and overnight loans to 3.25%, 2.75%, and 3.75%, respectively, effective June 24, 2022.

Felipe Medalla, managing director of the BSP, made the announcement ahead of the monetary authorities’ rate-setting meeting in August. 18, 2022.

“By raising the policy rate again, the Monetary and Credit Board recognized that significant further tightening of monetary policy was justified by signs of sustained and expanding price pressures amid continued normalization of monetary policy parameters,” Medalla explained.

He said the monetary authorities have taken note of the favorable circumstances brought about by a robust economic recovery this year, which indicate that domestic production could further tighten monetary policy.

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The Monetary Council hopes to better stabilize inflation expectations and tame growing threats to the inflation outlook by acting quickly, the head of Bangko Sentral said. Policies are specifically designed to help manage spillovers from other countries that could potentially undermine inflation expectations.

However, he added, monetary authorities continue to advocate immediate non-monetary government action to reduce the impact of continued supply pressure on commodity prices.

In line with its price stability mandate, the central bank “assures the public of its unwavering commitment and readiness to take further necessary action to bring inflation back to its target path over the medium term in line with its price stability mandate,” Medalla noted.

BSP’s latest decision comes after two consecutive 25 basis point rate hikes in May and June.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC) commented that Bangko Sentral’s surprise rate hike is part of the exchange rate toolkit due to the price stability mandate and inflation targeting system that has been in place since 2001.

He said this would help to better manage and capture both actual inflation and inflation expectations.

It is also a preventative measure against a potential large interest rate hike by the US Federal Reserve (Fed) from 0.75-1.00 percentage points to 2.50-2.75 percent at the next meeting of the Federal Open Market Committee, which will be held on July 27 of this of the year. Ricafort added that the interest rate differential is in favor of the US dollar and makes the previous local discount rate of 2.50 percent unusually equal or even lower than the federal funds rate.

“If necessary, a further increase in the local discount rate is possible, depending on the further increase in the Fed’s discount rate to reduce high inflation in the US. on inflation, as well as actual inflation data in the future,” he predicted.

Higher local policy rates will raise financing costs and borrowing costs for consumers, households, businesses, government and other institutions, even if they are still below the 6.1 percent inflation rate, according to an RCBC economist.