BSP raises prices for the first time since 2018

BSP raises prices for the first time since 2018
A salesman arranges vegetables at a public market in Manila. – PHILIPPINE STAR / RUSSEL A. PALMA

The Central Bank of the Philippines (BSP) has raised its key interest rate for fifirst time since 2018 to tame upflation.

The Monetary Council on Thursday raised the benchmark rate by 25 basis points (bps) to 2.25%, as expected by eight out of 17 analysts in a BusinessWorld vote last week.

Interest rates on day-to-day deposit and lending facilities were also increased by 25 bps to 1.75% and 2.75% respectively.

“The Monetary Council believes that a timely increase in BSP’s political interest rates will help stop further second round effects and temper the structure in inflexpectations, ”said BSP Governor Benjamin E. Diokno at a media briefing.

“Persistent inflationary pressure points to the need for rapid monetary action to anchor inflation expectations. “

Inflation rose to 4.9% in April, the highest in more than three years as oil and commodity prices rose sharply amid the war between Russia and Ukraine and supply chain disruptions.

The Monetary Board also observed the emergence of second-round effects, including the higher-than-expected adjustment of minimum wages in some regions. Inflation expectations have also risen, underlining the risk posed by persistent pressure on future wage and price outcomes, ” he said.

Sir. Diokno said the strong recovery in economic activity and the job market in the first quarter “allows BSP to continue rolling back its pandemic-induced interventions.”

He said the national government will fully settle on Friday the P300 billion zero-interest loan it secured from BSP, ahead of the original June 11 expiration date.

The Monetary Board will also reset BSP’s bond buying window to a standard liquidity facility that will also ensure the sustainability of its balance sheet. Sir. Diokno said the BSP had about 40% of government bonds at the height of the pandemic, but has been significantly reduced to about 2-3%.

“As the economic recovery continues to gain traction, the BSP will continue with its plans for the continued gradual withdrawal of its extraordinary liquidity interventions and the start of the normalization of its monetary policy settings,” he said.

The BSP chief said the pace and timing of further monetary policy actions will be “governed by data results.”

The start of the BSP’s tightening cycle came a week after the publication of data showing that gross domestic product (GDP) grew by better than expected 8.3% in fifirst quarter.

At the same time, the BSP upgraded its average inflforecast for 2022 to 4.6% from the previous forecast of 4.3%, which exceeds the target band of 2% -4%. For 2023, BSP is includedflthe forecast was raised to 3.9% from the previous 3.6%.

BSP Department of Economic Research CEO Zeno Ronald R. Abenoja said the central bank’s new inflation projections took into account higher oil prices and non-oil prices caused by the war between Russia and Ukraine.

BSP now expects the price of crude oil from Dubai to average around $ 100 per tonne. barrel this year from the previous projection of $ 83 per. barrel.

Mr. Abenoja said that the faster-than-expected growth, faster inflation, the rise in the minimum wage in Metro Manila and the impact of the political tightening of the US Federal Reserve were also considered in the newflation estimates.

“Inflation is likely to exceed 5% over the next few months,” he said. Diocno, with the highest expected in the second quarter.

“But apart from further negative shocks, we also expect inflation to slow down, heading closer to 2023 and returning to the target band by the middle of that year, when e.ffeffects of the global commodity price shock disappear, “he added.

Bank of the Philippine Islands Leading Economist Emilio S. Neri, Jr. said he now expects BSP to raise interest rates by at least 100 bps this year, from the previous 75 bps.

“Despite this, we believe the economy has enough cushion in case the BSP decides to raise its key interest rate further. Even with a 100 bp rate hike this year, the political rate will still be below historic and pre-panda levels. Furthermore, the impact of interest rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates, especially now that demand is almost back at the pre-pandemic level, ”he said in a note.

But the more signifiThere are no risks to the economic outlook, inflation and pesos depreciation against the US dollar, said Mr. Neri.

For MUFG Bank analyst Sophia Ng, inflation may peak at 5.5% in June as inflation risks become more broad-based. She said BSP can now be more “aggressive” in carrying out its exit strategy, noting how officials have become more haughty in their opinion.

“A total of 100 bps increases in 2022 will still not be able to fully phase out the cumulative 200 bps cuts made in 2020,” Ms. Ng in a note.

The BSP will have its next policy review on 23 June. – Luz Wendy T. Noble

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