BSP raises its key rate again by 25 basis points to 2.5%

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The Monetary Board (MB) again raised the key Bangko Sentral ng Pilipinas (BSP) rate – or the interest rate on money the central bank borrows from banks – by 25 basis points (bps) to 2 .5%.

This confirms recent signals from the MBs that the BSP is heading for a gradual pace of monetary policy tightening, unlike major central banks such as the US Federal Reserve.

The US Fed raised its key rate by a total of 125 basis points in two recent policy meetings, more than twice the pace of the BSP.

The MB’s latest move was a repeat of last May’s 25 basis point hike, acknowledging that the inflation outlook for this year and for 2023 continues to be dominated by risks of inflation accelerating.

With the policy rate hike taking effect on June 24, interest rates on deposit and overnight lending facilities were also raised by 25 basis points to 2% and 3%, respectively.

MB President and BSP Governor Benjamin Diokno told a briefing that the upward pressure on inflation came from the potential impact of rising global non-oil commodity prices, continuing shortage of domestic fish supply, as well as pending demands for higher transport tariffs due to rising oil prices.

“Meanwhile, the impact of a weaker-than-expected global economy [economic] the resumption and possible reimposition of local COVID-19 restrictions amid a surge in infections continue to be the key downside risks to the outlook,” Diokno said.

He said the BSP’s latest baseline forecast had increased. Average inflation is now expected to exceed the upper end of the 2-4% target range at 5% in 2022 and 4.2% in 2023.

In addition, average inflation is expected to decline further thereafter, standing at 3.3% in 2024.

“In view of these considerations, the [MB] believes that a continued increase in the policy rate allows BSP to withdraw its stimulus measures while preserving macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” said Diokno.

Commenting on the MB’s latest move, Rizal Commercial Banking Corp. Chief Economist Michael Ricafort said the relatively dovish signals from the BSP were partly weighing on the Philippine peso.

The local currency hit a fresh near 17-year low on Thursday, closing at 54.70 against the US dollar.

The peso has lost 1.70 against the dollar in just nine trading days since hitting the $53:1 level on June 10.

Ricafort said it was necessary to maintain a “healthy interest rate differential” between the BSP and the US Fed, given the differences in credit ratings.

The US government enjoys the highest credit rating of AAA, while the Philippines’ sovereign credit ratings are between one and three notches above the minimum investment grade.

BSP Deputy Governor Francisco Dakila Jr. said the central bank assumed the peso would average 51.98:$1 this year, which is around the middle of the forecast range. from 51 to 53 for every dollar.

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