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Philippines Monetary Policy September 2018

Philippines: Central Bank hikes key rate for the fourth consecutive meeting on intensifying price pressures

At its meeting held on 27 September, the Central Bank of the Philippines (BSP) decided to raise the overnight reverse repurchase facility (RRP) from 4.00% to 4.50%, the highest rate in seven years. The decision, which was expected by market analysts, represented the fourth interest rate increase since May. Moreover, the Bank also hiked the overnight deposit facility (ODF) and the overnight lending facility (OLF) rates by 50 basis points each; they now stand at 4.00% and 5.00%, respectively. The ODF establishes the floor, whereas the OLF establishes the ceiling of the interest rate corridor system.

The Bank’s decision was primarily motivated by intensifying inflationary pressures, which have been driven by strong supply side factors and firm domestic demand. Higher oil and commodity prices in international markets along with a depreciating peso are stoking price pressures and inflation hit an over nine-year high in August (August: 6.4%, July: 5.7%), moving further above the upper bound of the Bank’s target range of 3.0% plus or minus 1.0 percentage point. Subsequently, the BSP revised its inflation forecasts for 2018 to 5.2% (previously reported: 4.9%) and to 4.3% in 2019 (previously reported: 3.7%). According to the BSP, risks to the inflation outlook remain tilted to the upside due to exchange rate volatility, geopolitical tensions and monetary policy normalization in advanced economies.

In its communiqué, the Bank struck a hawkish tone and reiterated its commitment to “take all necessary policy actions to address the threat of high inflation”. This, in tandem with the Bank’s above target range inflation forecast in 2019, suggest another rate hike before the end of the year is not improbable.

The next monetary policy meeting will be held on 15 November.

Philippines Interest Rate Forecast

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