Philippines Central Bank Resorts To Unexpected Off-Cycle Rate Hike

Philippines Central Bank Resorts To Unexpected Off-Cycle Rate Hike

November 2, 2023

The Philippine central bank took an off-cycle monetary policy action on Thursday as it raised its key interest rate to anchor inflation expectations and to provide support to the currency.

The board of Bangko Sentral Ng Pilipinas, governed by Eli Remolona, decided to hike the target reverse repurchase rate by 25 basis points to 6.50 percent.

Accordingly, the interest rates on the overnight deposit and lending facilities were lifted to 6.0 percent and 7.0 percent, respectively.

Markets were expecting a rate hike at the scheduled monetary board meeting on November 16.

The board said urgent monetary action was necessary to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.

Policymakers observed that inflation expectations increased sharply, highlighting the risk of further second-round effects. The balance of risks to the inflation outlook leans significantly toward the upside.

“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,” the bank said.

At 6.1 percent in September, headline inflation remained above the central bank’s 2-4 percent target range.

Regarding output, the board observed dissipating pent-up demand in the near term but medium-term growth prospects remain largely intact.

ING economist Nicholas Mapa said as Remolona has hinted in the past that he would possibly need to hike more than once, at least one more rate hike from the BSP is likely before the end of the year.

Today’s out of cycle move points to a greater sense of urgency among policymakers, economists at Capital Economics said.

“We think the BSP decided to bring forward the hike that it would otherwise have made next month, to provide some support to the currency,” they said.

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