Families like to go to a shopping mall in Antipolo, Rizal, November 14th. The Philippine central bank expects inflation to peak in December as holiday spending surges. — FILIPINO STAR/ MIGUEL DE GUZMAN
THE BANGKO SENTRAL ng Pilipinas (BSP) raised interest rates to their highest level in 14 years on Thursday, signaling further tightening albeit at a slower pace.
The Monetary Board (MB) raised its overnight funds rate by 50 basis points (bps) to 5.5%, as predicted by 13 of 15 analysts in a BusinessWorld poll last week. This took the policy rate to its highest level since November 2008 when it was 6%.
The move followed the US Federal Reserve’s 50 basis point hike at its December 13-14 meeting, which brought its own benchmark interest rate to between 4.25% and 4.5%.
GNP interest rates on overnight and credit facilities were also raised to 5% and 6% respectively.
Since May, the central bank has increased borrowing costs by a total of 350 basis points.
“The Monetary Board reached its decision after noting the continued rise in headlines and the sharp rise in core inflation in November amid pent-up demand,” BSP Governor Felipe M. Medalla said at a briefing after the policy meeting.
Headline inflation accelerated from 7.7% in October to a 14-year high of 8% in November. For the period from January to November, inflation averaged 5.6%.
Core inflation, which excludes volatile food and fuel prices, rose 6.5% in November from 5.9% in October and 2.4% in November 2021. Over the 11 months to November, core inflation averaged 3, 7%
Mr Medalla said the BSP left its average inflation forecast for the year at 5.8% but raised the average inflation forecast for 2023 to 4.5% from the previous 4.3%. These forecasts are still above the GNP target range of 2-4%.
Meanwhile, the inflation forecast for 2024 has been lowered to 2.8% from a previous 3.1%, reflecting “further decline in oil prices, peso appreciation and slightly lower domestic growth prospects, partly due to cumulative policy rate hikes attributable to GNP”.
Mr Medalla said upside risks to the inflation outlook mainly stem from higher global food prices due to higher fertilizer prices and supply chain disruptions.
“Domestically, trade restrictions, increased fruit and vegetable prices due to weather disruptions, higher sugar prices, pending requests for fare increases, as well as potential wage adjustments in 2023 could all push inflation higher,” Mr. Medalla said.
The impact of a slower global economic recovery is still the main downside risk to the outlook, he added.
GNP Deputy Governor Francisco G. Dakila, Jr. said the central bank revised its inflation forecast for next year due to faster-than-expected inflation numbers in November and the looming impact of approved water price hikes beginning in 2023.
“We are also now seeing that inflation could continue to rise in December, although it would be very slight,” Mr Dakila said. “On the other hand, this would be partially offset by the lower crude oil price assumption as well as the strengthening of the peso.”
Mr Medalla said the latest forecasts point to a peak in inflation in December, not in November as previously expected, due to higher food prices caused by recent typhoons, higher liquefied petroleum gas (LPG) prices and electricity prices.
The GNP chief said inflation is expected to return to the 2-4% target range by H2 2023 and back to the lower end of the target range by Q4 2023 and Q1 2024 due to base effects.
Following the BSP announcement, the Philippine peso closed at P55.685 against the US dollar, up six centavos from its close of P55.745 on Wednesday. Year to date, the peso has weakened P4.685, or 8.4%, from its close of P51 on December 31, 2021.
“GDP’s top priority remains bringing inflation back to target levels. We remain ready to adjust our stance as needed to ensure price stability over the medium term. As always, our actions will remain data dependent and guided by the most recent information available,” said Mr. Medalla.
“The more favorable inflation dynamics overseas certainly allow for a modest increase in the overnight reverse repurchase rate to be factored in. However, it also takes time for the full impact of monetary policy to manifest itself in inflation and GDP data,” he added.
Mr Medalla also said the current regulatory relief measures will only be maintained until December, while the credit card cap measures will be extended and reviewed next month.
“Most of our pandemic-related measures will expire by the end of 2022 as the economy has gained sufficient growth momentum,” he said.
The Philippine economy grew 7.6% in the third quarter, bringing the average year-to-date growth to 7.7%. Economic managers expect full-year GDP growth to settle within 6.5-7.5%.
2023 SLOWER RATE RISE
According to BSP, the pace of rate hikes could slow next year depending on the data.
“If I put my own money on it, whether it’s 25 basis points or 50 basis points … more likely it could go either way, it depends on the data,” Mr Medalla said. “But it would be harder for me to bet that this is the last rate hike.”
The BSP chief said he saw less urgency to match the Federal Reserve’s monetary tightening next year as bringing inflation back to the 2-4% target remains its top priority.
After the political announcement, economists expect further rate hikes next year.
“We believe the central bank will hike interest rates again early next year, but with inflation likely to peak soon and growth slowing, the GNP tightening cycle is nearing the end,” said Gareth Leather, senior Asia economist at Capital Economics , in a statement.
Mr Leather said headline inflation in the Philippines could likely peak in the coming months as the impact of supply disruptions from Typhoon Noru ease.
“The central bank struck a fairly dovish tone on inflation today, saying it is expected [inflation] peak in December and fall back on target in the second half of next year (slightly earlier than we expect),” said Mr. Leather.
He expects BSP to hike rates by 25 basis points early next year and that would mark the end of the tightening cycle.
For Nicholas Antonio T. Mapa, Senior Economist at ING Bank NV Manila, inflation would still remain elevated next year due to ongoing second-round effects.
“With inflation expected to remain elevated, we believe BSP will maintain its hawkish stance into 2023, mostly aligning with the Fed while monitoring the trajectory of inflation,” he said.
Mr Mapa added that BSP could push its policy rate up to 6-6.25% next year.
“We believe BSP is committed to maintaining the current interest rate differential with the US amid a weak peso and elevated inflation,” Makoto Tsuchiya, assistant economist at Oxford Economics, said in a note.
Mr. Tsuchiya also expects the central bank to hike 25 basis points in the first quarter of 2023, which will bring the policy rate to 5.75%.
“Our US team expects the Federal Reserve to hike interest rates by 25 basis points at its first meeting in 2023, and we expect BSP to follow that move rather than overtake the Fed,” he said.
The US Federal Reserve has hiked 425 basis points so far this year. — Keisha B. Ta-asan