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September 28, 2022

BSP to hike interest rates, inflation forecasts

The central bank Monetary Board is seen hiking interest rates on Thursday as the stronger-than-expected gross domestic product (GDP) in the first quarter, the elevated inflation, and the series of wage hikes approved by the government have narrowed the space for accommodative monetary policy.

“The space of maintaining an accommodative policy stance has considerably narrowed,” Bangko Sentral ng Pilipinas Governor Benjamin Diokno said.

After slashing key policy rates by 275 basis points since 2019, the Monetary Board maintained a loose and expansionary monetary policy stance to support the economy rebounding from the pandemic-induced recession.

As part of its COVID-19 response measures, the BSP slashed interest rates by 200 basis points in 2020 alone that brought the benchmark rate to an all-time low of two percent.

The last time the BSP raised interest rates was in November 2018 as it jacked up key rates by 175 basis points to 4.75 percent due to elevated inflation brought about by soaring global oil prices.

So far this year, inflation quickened to 4.9 percent in April from four percent in March, while the GDP booked a stronger-than-expected 8.3 percent expansion in the first quarter of the year.

“Inflation pressures in recent months have been linked mainly to supply-side factors, which we argue are still best addressed by targeted non-monetary interventions by the national government. Meanwhile, second round effects is starting to manifest,” Diokno said.

Adding to inflation pressures, the Wage Board approved several wage hike petitions in the National Capital Region (NCR) and other provinces.

“These developments strengthen the case for a withdrawal of monetary policy accommodation as inflationary pressures now appear more likely to persist and threaten to this anchor inflation expectations. While the BSP stands ready to deal with this risk to inflation and economic growth, any adjustments in the monetary policy stance will be done in a timely manner so as not to disrupt the growth momentum while preventing price pressures from becoming entrenched,” Diokno said

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