By Aaron Michael C. Sy, Reporter
THE PHILIPPINE central bank increased its benchmark rate of interest for the primary time in greater than two years, while signaling that more “small” rate of interest hikes could follow to safeguard spiraling prices as a result of the Iran war.
The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) raised the goal reverse repurchase rate by 25 basis points (bps) to 4.5% at its policy meeting on Thursday, effectively ending an easing cycle that cut the benchmark rate by 225 bps starting in August 2024.
The central bank also adjusted the rates of interest on its overnight deposit and lending facilities to 4% and 5%, respectively.
“Once we start raising the policy rate, we’re prone to raise it again,” BSP Governor Eli M. Remolona, Jr. told a news briefing after the policy decision. “That’s a greater strategy than raising it only one time and making an enormous hike as a substitute of a small one.”
He noted that monetary policy involves “several steps” to “minimize disruptions to the economy.”
The choice was in step with the expectations of 11 of 19 analysts in a BusinessWorld poll last week.
It followed an off-cycle meeting last month where the BSP held rates regular because it sought to calm markets amid growing uncertainties.
Mr. Remolona said the central bank raised borrowing costs to maintain inflation expectations anchored and contain the buildup of spillover effects.
“Inflation expectations are rising further, increasing the danger that they may de-anchor from our goal,” he said. “This may cause inflation to turn out to be persistent, hurting households in addition to businesses.”
The BSP raised the policy rate based on a scenario that oil futures would remain high within the near term, with spot prices near $100 a barrel, before regularly declining at the tip of the 12 months and further into 2027.
Mr. Remolona said supply shocks have already affected the costs of certain items in the patron price index.
“For now, yes, it’s mainly a worldwide supply shock,” he said. “But we’re starting to see spillover effects into other items in the patron basket. And the costs of those other items are affected by domestic demand.”
In March, headline inflation rose to an almost two-year high of 4.1%, faster than the BSP’s 3.1%-3.9% forecast and a couple of%-4% goal for the 12 months.
The choice to lift rates of interest was not unanimous, Mr. Remolona said, adding that the BSP had considered a 50-bp rate increase but decided against it to avoid any large moves.
Clearer evidence of a pointy and prolonged oil price shock de-anchoring inflation expectations would warrant a much bigger hike, he added.
The central bank now expects inflation to average 6.3% this 12 months and 4.3% next 12 months, each above its 4% ceiling, before returning to its tolerance range in 2028.
“It would remain above 5% for many of this 12 months,” BSP Deputy Governor Zeno Ronald R. Abenoja told the identical briefing. “We don’t think it would de-anchor, but when it’s possible it would de-anchor, then we’d need to change our strategy.”
‘TOLERANCE RANGE’
Mr. Remolona said the BSP would need to increase borrowing costs regularly to avoid slowing economic growth.
“The thought will not be to bring it back to throughout the tolerance range instantly,” he said. “Because if we try to try this, then it’s very costly for the economy. What we wish is to bring it right down to throughout the tolerance range inside an affordable period without hurting the economy an excessive amount of.”
In a separate statement, the central bank said the inflation outlook has worsened as a result of the war within the Middle East, which has driven up global oil and fertilizer prices.
These increases have begun feeding into domestic fuel and food costs, adding pressure on consumer prices.
At the identical time, core inflation, which excludes volatile food and energy items, has continued to rise, indicating broader underlying price pressures across the economy.
The BSP said its latest projections show the next inflation trajectory, with average headline inflation expected to exceed the 4% ceiling of its goal range in each 2026 and 2027.
Inflation expectations have also increased, raising the danger that price pressures could turn out to be more entrenched if left unchecked.
“After considering its options, the Monetary Board deemed it obligatory to take timely and preemptive policy motion to safeguard price stability,” the central bank said.
The BSP said the speed increase goals to anchor inflation expectations and stop second-round effects, comparable to higher transport fares and wages, from further fueling price increases.
“A measured increase within the policy rate will still accommodate economic recovery over the medium term,” it added.
The BSP reiterated that future policy decisions can be guided by incoming data, particularly developments in inflation and global conditions.
It added that it stands able to take further monetary motion as needed to bring inflation back to its 3% goal, consistent with its mandate of maintaining price stability.
Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas in a Viber message said the BSP’s tightening move would support market sentiment and the peso.
Some analysts said the rise may very well be a “one-and-done” rate hike, citing growth risks, easing global crude oil price volatility and a ceasefire between the US and Iran.
“Risks are tilted towards further hikes if inflation expectations show strong signs of de-anchoring,” Oxford Economics Assistant Economist Jun Hao Ng said in a note.
Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the medium-term outlook for global oil prices has softened, while local pump prices have also rolled back.
“The Board’s next move is prone to be a rate cut in some unspecified time in the future this time next 12 months, when this external price shock starts to drop out of the year-on-year inflation picture,” he added. — with Norman P. Aquino