The policy-making Monetary Board of the Bangko Sentral ng Pilipinas (BSP) at its meeting on Thursday raised the interest rate on the its overnight reverse repurchase facility by 50 basis points to 6 percent, effective tomorrow, 17 February 2023.
Accordingly, the rates at which it borrows from or lends to banks overnight is set to 5.5 percent and 6.5 percent, respectively.
In deciding to raise the policy interest rate anew, the Monetary Board noted that the latest baseline inflation forecast path has shifted higher relative to the previous assessment.
It projected the average inflation to breach the upper end of the 2 percent to 4 percent target range at 6.1 percent in 2023, before returning to within target at 3.1 percent in 2024.
The forecasts were adjusted upwards following the higher-than-expected inflation outturn in January as well as the continued stronger rebound in domestic demand and gross domestic product (GDP) growth in Q4 2022.
Both headline and core inflation measures have also continued to increase, indicating a further broadening of price pressures, particularly in services. Meanwhile, inflation expectations have likewise risen further, underscoring the need to preempt the emergence of further second-round effects.
According to the BSP, the balance of risks to inflation now leans toward the upside for both 2023 and 2024, with pressures emanating from the potential impact of global food market uncertainties, continued domestic shortages in key food items, additional transport fare hikes amid elevated oil prices, and the higher-than-expected wage adjustments in 2023.
But it acknowledged the impact of a weaker-than-expected global economic recovery remains the primary downside risk to the inflation outlook.
The Monetary Board also reiterated its support for timely and more aggressive whole-of-government actions to mitigate the impact of persistent supply-side pressures on food prices, including trade‑positive measures and significant progress to boost productivity.
Given these considerations, the Monetary Board deems a strong follow-through monetary policy response as necessary to reduce the risk of a breach in the inflation target in 2024.
An upward adjustment in the policy interest rate would also prevent inflation expectations from drifting further away from the target band.
The Monetary Board also believes that, with domestic growth exceeding expectations in 2022, monetary action can help to dampen potential demand-side pressures and second-round effects without unduly hindering the sustained momentum of economic growth.
The BSP reassures the public the monetary authorities stand ready to take all necessary policy action to bring inflation to within the 2-4 percent government target over the medium term, in line with its primary mandate of ensuring price stability.
