The Monetary Board -- policymaking body of the Bangko Sentral ng Pilipinas -- raised at its regular meeting today the policy rates by 25 basis points, effectively raising interest rates on overnight deposit and lending facilities at 6 and 7 percent, respectively.
In a press statement, the Board said it recognized the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.
The latest baseline projections point to an elevated inflation path over the policy horizon as upside risks continue to manifest. Before today's monetary policy action, the staff risk-adjusted forecast for 2024 was 4.7 percent (from 4.3 percent previously). This is well above the government’s target range.
Balance of Risks
At the same time, second-round effects have broadened, including transportation fare increases and minimum wage adjustments. Inflation expectations have risen sharply, highlighting the risk of further second-round effects.
The balance of risks to the inflation outlook still leans significantly toward the upside, due mainly to the potential impact of higher transport charges, electricity rates, international oil prices, and minimum wage adjustments in areas outside the National Capital Region.
Meanwhile, the effect of a weaker-than-expected global recovery as well as government measures to mitigate the effects of El Niño weather conditions could temper inflationary impulses, the BSP said.
Closely Monitoring
On the output side, recent domestic indicators point to dissipating pent-up demand in the near term. Nevertheless, the country's medium-term growth prospects remain largely intact.
The Monetary Board is closely monitoring the impact of the increase in interest rates as these work their way through the economy.
It also continues to support fiscal efforts to sustain growth through more rapid programmed spending, as well as non-monetary interventions to address persistent supply-side pressures on prices, and supports the economic managers' timely efforts to extend the effectivity of EO 10 beyond 2023 as well as to reform the Tariff and Customs Code.
Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident. In this regard, the Monetary Board will continue to be guided by incoming data.
The BSP is prepared for follow-through monetary policy action as necessary to bring inflation back to a target-consistent path, in keeping with its price stability mandate.
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