The Monetary Board—policymaking body of Bangko Sentral ng Pilipinas—raised anew by 25 basis points the key rates to 6.25 percent for the overnight reverse repurchase rate, bringing the interest rate up to 5.75 percent for overnight deposit facility and 6.75 percent for overnight lending facility.
Its decision was based on inflation being seen to continue in an elevated path in the near term because of broad-based price pressures from strong domestic demand and supply-side constraints.
It projects inflation to remain above 4 percent until the third quarter of 2023, which would be equivalent to 19 consecutive months of above-target inflation. It expects inflation to decelerate close to the lower end of the target range by Q1 of 2024, due to negative base effects and the expected decline in global oil and non-oil prices.
Since November 2008, the Monetary Board had noted that headline inflation accelerated to its fastest pace in January 2023. While headline inflation has eased slightly, various measures of core inflation continue to rise, indicating a further broadening of price pressures. The risks to the inflation outlook remain significantly skewed to the upside for both 2023 and 2024.
The board said it deemed necessary for a continued monetary action and increased vigilance until there is firm evidence that inflation is reverting to the target in a sustained manner. Monetary policy continues to be focused on anchoring inflation expectations, which remain near the upper end of the inflation target band. Follow-through monetary tightening will help anchor inflation expectations by underlining the BSP’s commitment to its price stability objective.
The board said the strong near-term gross domestic product (GDP) growth path has continued to feed into price pressures, both for goods and services.
Nonetheless, the domestic economy is seen to be able to maintain its momentum despite a tighter monetary policy stance. In a high-inflation environment with robust pent-up demand, inflation expectations will require closer monitoring until a deceleration in headline inflation becomes evident.
The board also considered the rise in core inflation rates which suggests a continued widening of price pressures, even as supply-side pressures on non-core elements (food and energy prices) may be slowly starting to abate.
However, the marginal decline in headline inflation in February does not yet signify the beginning of broad disinflation. With inflation proving to be more persistent than expected, the BSP will need to raise real interest rates to positive territory to temper the emergence of further second-round effects.
It said that further monetary tightening will also preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in the US.
Meanwhile, the domestic banking sector remains sound and stable, which allows for a measured increase in the monetary policy rate without compromising financial stability. The next meeting of the Monetary Board on the monetary policy stance is scheduled on May 18, 2023.
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