Manila: BSP Raises Policy Rate by 25 Basis Points in Off-Cycle Move

Manila, Philippines – In an off-cycle decision on Thursday, the Bangko Sentral ng Pilipinas’ (BSP) Monetary Board announced a 25 basis point increase in the policy rates, a move prompted by expectations that inflation would continue to exceed targets until the first half of 2024.

According to a new release by the Philippines News Agency, the Monetary Board made this off-cycle adjustment during its regular meeting, raising the BSP’s target reverse repurchase (RRP) rate to 6.50 percent, effective from October 27, 2023. This brings the interest rates on the overnight deposit and lending facilities to 6 percent and 7 percent, respectively.

Governor Remolona explained that the decision was taken to counteract supply-side price pressures, preventing the potential emergence of additional second-round effects and the destabilization of inflation expectations. Baseline projections indicate a sustained elevated inflation path over the policy horizon, with ongoing upside risks.

The BSP has gradually increased policy rates by a total of 450 basis points since May of the previous year in an attempt to bring inflation back within the target range. Governor Remolona expects headline inflation to remain elevated until the first half of the following year, gradually falling within the government’s 2 to 4 percent target range by the third quarter of 2024.

In September, headline inflation reached 6.1 percent, prompting the BSP’s decision to take action. Governor Remolona acknowledged that, in his personal view, the Monetary Board should have adjusted rates earlier.

Regarding consumer and business expectations, Remolona expressed concern about the results of the household expectation survey, which showed that about 92 percent of consumers anticipated inflation above 4 percent in the next 12 months. He emphasized the importance of monetary policy in breaking the link between supply-side price shocks and expectations, as well as second-round effects.

Despite the recent tightening, the BSP has not observed a significant impact on growth prospects. GDP growth is expected to be 4.5 percent in the third quarter, slightly higher than the 4.3 percent expansion in the second quarter.

The Monetary Board will closely monitor the impact of the rate hike as it ripples through the economy and has not ruled out the possibility of another rate hike when it convenes on November 16.

The October 2023 headline inflation data is scheduled for release early next month.