Banko Sentral: Economy can absorb policy rate hike

The economy is strong enough to accommodate the recent policy rate increase, the Banko Sentral ng Pilipinas (BSP) said, hinting at another key rate hike as the country’s monetary agency adopts an unprecedented measure to ease financial pressures and support economic recovery under the Marcos administration.

“The BSP’s monetary policy settings will remain supportive of economic growth and financial stability,” BSP Gov. Felipe Medalla said at a recent online forum organized by the University of the Philippines School of Economics Alumni Association (UPSEAA).

In July, the BSP delivered a hawkish 75 basis points (bps) increase in key policy rates, bringing the overnight reverse repurchase facility to 3.25 percent, overnight deposit facility at 2.75 percent, and overnight lending facility at 3.75 percent.

The latest hikes bring the policy rates back to their pre-pandemic levels in February 2020.

This is also the most aggressive rate hike of the BSP since the interest rate corridor was implemented in June 2016, and the first off-cycle adjustment since April 2020.

Moreover, it raised interest rates after inflation—the rate of increase in the prices of goods and services—rose to 6.1 percent in June from 5.4 percent in May and 3.7 percent in June 2021.

This is also the fastest inflation print since the 6.9 percent recorded in October 2018.

For his part, chief economist Robert Dan Roces of Security Bank Corp. said over the weekend that “inflation remains the key consideration as it affects growth and reopening, and thwarts consumption—the main engine of the economy.”

“Thus, the deeper-than-expected slowdown in second-quarter GDP (gross domestic product) is unlikely to deter the BSP from raising interest rates by 50 bps on August 18,” Roces added.

Sticky inflation, which weakened private consumption in the second quarter and is poised to do so again this quarter, will compel the BSP to remain hawkish.

“We also expect another 25 bps in its September meeting before a pause in the fourth quarter to give way for the peak consumption and remittance season,” Roces said.

With the high cost of electricity, diesel, food, petroleum, internet, among others, foreign banks are forecasting the BSP to increase policy rates by 125 basis points before the end of the year to bring the benchmark rate to 4.50 percent.

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