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Philippines Monetary Policy October 2023

Philippines: Central Bank delivers a surprise off-cycle hike in October

The Monetary Board of Bangko Sentral ng Pilipinas (BSP) raised the target reverse repurchase (RRP) rate by 25 basis points to 6.50% at a meeting on 26 October, weeks ahead of its scheduled monetary policy meeting on 16 November. Concurrently, the rates on the overnight deposit and lending facilities—which establish the floor and ceiling of the interest rate corridor—rose to 6.00% and 7.00%, respectively.

The BSP labeled October’s decision as “urgent monetary action” to curb the impact of second-round effects on inflation. The Bank’s latest projections saw inflation averaging 4.7% in 2024, up from 4.3% previously and well above the upper bound of the 2.0–4.0% target band. Moreover, second-round effects also broadened due to higher transport fare prices and minimum wage adjustments. In turn, inflation expectations rose sharply, putting price stability ahead further at risk. Meanwhile, although current data showed domestic demand losing steam, the medium-term outlook remained unchanged, giving the Bank room for the unexpected maneuver.

The Bank remained hawkish in its communique, stating that it deemed 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”. As such, further monetary policy tightening ahead could not be ruled out, particularly amid upside risks stemming from higher oil prices and fallout from the El Niño weather event. In a separate statement on 27 October, Governor Remolona stated that both a pause and another rate hike could be possible at the next regular meeting on 16 November.

Nicholas Mapa, senior economist at ING, commented on the outlook: “BSP’s off-cycle rate hike indicates Governor Remolona’s commitment to price stability as he hopes to corral inflation expectations. Remolona has hinted in the past that he would possibly need to hike more than once, and we therefore expect at least one more rate hike from the BSP before the end of the year. Remolona has also indicated that he believes policy rates can rise to 6.75% before harming the economy. However, given that price pressures remain largely supply-side in nature, we expect inflation to stay elevated until supply-side remedies are implemented.”

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