BSP raises interest rates by 25 basis points 

Improvement in domestic economic activities and projected further acceleration of domestic inflation rate made Philippine monetary authorities hike the Bangko Sentral ng Pilipinas’ (BSP) key rates by 25 basis points on Thursday, according to a report by Philippine News Agency.

Effective May 20, 2022, the central bank’s overnight reverse repurchase (RRP) rate, which was cut by a total of 200 basis points in 2020 to a record-low 2 percent will increase to 2.25 percent.

The overnight deposit rate will also rise to 1.75 percent and the overnight lending rate to 2.75 percent.

BSP Governor Benjamin Diokno, in a virtual briefing, said baseline inflation forecasts have shifted further to the upside given the continued rise in oil prices, which has also resulted in second round effects like the increase in the minimum wage in the National Capital Region (NCR), among other areas.

The Labor department recently announced that the minimum wage in NCR will be increased by PHP33 to PHP570 for the non-agriculture sector and to PHP533 for the agriculture sector, effective in the first week of June 2022.

The BSP now forecasts average inflation for this year to be at 4.6 percent from 4.3 percent last March. The 2023 forecast is now at 3.9 percent from 3.6 percent.

The rate of price increases is also seen to peak at over 5 percent in the second half of the year, because of the projected jumps in oil prices, the increase in the minimum wage, the rise in Federal Reserve rates, and the slowdown in the expansion in global economic output.

It is projected to decelerate to within the government’s 2 to 4-percent target band in the second quarter of 2023.

“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,” Diokno said.

He said the central bank’s policy-making Monetary Board (MB) also supports the implementation of non-monetary measures to address the impact of continued 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,” he said, adding that future monetary policy decisions will remain to be data-driven.