Philippines: Central Bank
August 18, 2022
At its regular meeting on 18 August, the Bangko Sentral ng Pilipinas (BSP) raised the overnight reverse repurchase facility rate by 50 basis points to 3.75%. Concurrently, the rates on the overnight deposit and lending facilities—which establish the floor and the ceiling of the interest rate corridor—were increased to 3.25% and 4.25%, respectively. The move was in line with market expectations.
Inflation remained a key concern for the BSP, as in July the headline reading climbed to 6.4%, a four-year high. In turn, the Bank updated its inflation forecasts for 2022: It now projects annual inflation in 2022 to sit at 5.4%, firmly above the upper bound of the 2.0–4.0% target band. In addition to the rising price pressures, H1’s robust economic performance, elevated inflation expectations and the growing risk of second-round effects motivated the August hike.
In its communiqué, the Bank remained hawkish regarding its future moves, reiterating its “commitment and readiness to take all necessary actions to steer inflation towards a target-consistent path over the medium term”. As such, further tightening remains a near-certain possibility: The majority of our panel has penciled in a minimum of 25 basis points of additional tightening by the end of the year. The next monetary policy decision will be announced on 22 September.
On the impact of inflation on upcoming Bank moves, Nicholas Mapa, senior economist at ING, commented:
“ING expects inflation to accelerate further, likely peaking at 6.8% by October, in line with BSP’s own projections for inflation to average 5.4% for 2022. Against this backdrop of rising prices, we believe that BSP can carry out 25bp rate increases at each of the remaining policy meetings for the balance of the year. This would take the BSP’s policy rate to 4.5% by December.”
Nomura’s analysts Rangga Cipta and Euben Paracuelles commented further on the role of currency fluctuations in the BSP’s upcoming moves:
“As we argued before, further rate hikes will not just be driven by above-target inflation in the coming months but also likely by more pressures on the currency in view of still-significant external vulnerabilities and signs of locals losing confidence that would require more decisive responses.”