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Philippines Monetary Policy December 2022

Philippines: Central Bank hikes rates again in December, deems pause unlikely

At its 15 December meeting, the Bangko Sentral ng Pilipinas (BSP) met market expectations and raised the overnight reverse repurchase facility rate by 50 basis points to 5.50%, a 14-year high. Simultaneously, it brought the overnight deposit and lending facilities rates—which establish the floor and the ceiling of the interest rate corridor—to 5.00% and 6.00%, respectively.

The BSP delivered a smaller hike than it had in November, as below-expectation U.S. inflation lessened downward pressure on the Philippine peso. Nevertheless, the Bank tightened the economys belt further, following Novembers 14-year high headline inflation rate and a spike in core inflation—a signal of excess domestic demand pushing prices up. The Bank also revised its 2023 average inflation prognosis to 4.5%—up 0.5 percentage points since November—illustrating the economys unresponsiveness to policy tightening.

The BSP remained hawkish, deeming it “necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible”. Given upside risks to the inflationary outlook from higher global food prices and second-round effects at home, the Bank should bring the policy rate higher in 2023; Governor Felipe Medalla considered the Bank unlikely to hit the brakes in the next two meetings. Meanwhile, the BSP will be less tied to mirroring moves by the U.S. Fed given an improved USD-to-peso exchange rate and lessening imported inflation.

On the policy trajectory ahead, Debalika Sarkar and Sanjay Mathur, economists at ANZ, commented:

“The BSP plans to “moderate” its pace of policy tightening once the inflation outlook improves. Coupled with the fact that inflation is expected to peak in December, the probability of more 50 basis points hikes is low. For our part, our baseline case is for hikes of 25 basis points in each of the two meetings until March 2023. With this, our 2023 end-year policy rate forecast stands at 6.00%.”

In contrast, Euben Paracuelles and Rangga Cipta, analysts at Nomura, commented on H2 2023:

“[We] still forecast BSP will reverse course and start cutting its policy rate by 25 basis points each in Q3 and Q4 2023, when we expect headline inflation to fall back to within BSPs target. This would bring the policy rate to 5.50% by end–2023. While the governor indicated today that it is still too early to talk about rate cuts, he said BSP would be able to consider them when it is confident that inflation is already going back to within the target, which BSP expects to be met by Q3 2023 […].”

The next monetary policy meeting should take place on 16 February 2023.

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