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May 27, 2024

BSP begins rate liftoff with 25 basis points hike

The Bangko Sentral ng Pilipinas (BSP) started its interest rate liftoff with a 25 basis points hike on the back of stronger economic growth in the first quarter and accelerating inflation.

BSP Governor Benjamin Diokno said the Monetary Board has raised the interest rate on the central bank’s overnight reverse repurchase facility to 2.25 percent from an all-time low of two percent, effective 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,” Diokno said.

The Philippines reported a faster-than-anticipated gross domestic product (GDP) expansion of 8.3 percent in the first quarter, stronger than the market expectation of 6.7 percent.

On the other hand, inflation kicked up to 4.9 percent in April and exceeded the BSP’s two to four percent target range from four percent in March amid soaring oil and food prices.

The Monetary Board also observed the emergence of second-round effects, including the higher-than-expected adjustment in minimum wages in some regions. Inflation expectations have likewise risen, highlighting the risk posed by sustained pressures on future wage and price outcomes.

“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 BSP chief said.

According to Diokno, the Monetary Board reiterates its support for the sustained implementation of non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation, particularly food supply and prices.

On balance, persistent inflationary pressures point to the need for prompt monetary action to anchor inflation expectations. 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,” Diokno added.

In 2018, the BSP raised interest rates by 175 basis points to 4.75 percent amid soaring global oil prices. Since 2019, the central bank reduced policy rates by 275 basis points, including 200 basis points in 2020 to cushion the impact of the COVID-19 pandemic, that brought the benchmark rate to an all-time low of two percent.