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Philippines Monetary Policy May 2022

Philippines: Central Bank starts hiking cycle in May with 25 basis points increase

At its monetary policy meeting on 18 May, the Central Bank of the Philippines (BSP) raised the overnight reverse repurchase facility rate by 25 basis points to 2.25% from its record low of 2.00%, matching market analysts’ expectations. Likewise, the overnight deposit facility and the overnight lending facility rates—which establish the floor and the ceiling of the interest rate corridor—were left at 1.50% and 2.50%, respectively.

The Central Bank also announced that the government would pay back the PHP 300 billion it owes to the Bank on 20 May instead of the earlier-agreed date of 11 June. It also said it would revert its government bond purchasing scheme from an emergency program to a regular liquidity facility.

The rate hike signaled a marked shift in the Bank’s monetary policy strategy. As recently as last month, Governor Diokno had stated that monetary policy at the time was “appropriate” given the then-outlooks for inflation and growth. Rate hikes were discussed as potentially occurring in H2, not in May.

The combination of a worsening inflation outlook and an improved growth outlook pushed the Bank to speed up its tightening of monetary policy. The Bank raised its inflation forecasts for this year to 4.6% from 4.3%—further above the Bank’s target range of 2.0–4.0%—and for 2023 to 3.9% from 3.6%. It also warned that risks for inflation next year were now seen as being on the upside as opposed to being balanced. In conjunction with rising inflation expectations and evidence of second-round effects—where higher prices lead to wage increases, which further increase prices—the Bank expressed its concern that inflation expectations could become de-anchored. Meanwhile, a better-than-expected Q1 growth figure boosted optimism about economic prospects. Thus, the Bank felt it had the scope to raise interest rates to keep inflation expectations anchored without seriously hurting the economic recovery.

The Bank’s commentary on the direction of its future monetary policy turned notably more hawkish: It said that persistent price pressures will require “prompt monetary action” in order to anchor inflation expectations.

Analysts at Nomura said:

“We continue to expect more rate hikes in the coming months and forecast the policy rate to reach 3.0% by end-2022 and 3.5% by Q1 next year. Our forecast remains supported by our view that headline inflation will rise above 5% in the coming months and average 4.6% for the full year, in line with BSP’s latest forecast. We believe BSP’s message was clear today that it is now firmly focused on addressing underlying inflation concerns as the growth outlook is improving. […] The risk to our forecast is that the rate hikes could be front-loaded, i.e. reaching 3% earlier, taking into account the upside risks on headline inflation.”

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