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Philippines Monetary Policy July 2022

Philippines: Central Bank surprises with 75 basis point hike in unscheduled meeting in July

At an unscheduled meeting on 13 July, the Central Bank of the Philippines (BSP) raised the overnight reverse repurchase facility rate by 75 basis points to 3.25%. The move caught the market off-guard; no revision of monetary policy was expected until August. Meanwhile, the overnight deposit facility and the overnight lending facility rates—which establish the floor and the ceiling of the interest rate corridor—were also raised by 75 basis points to 2.75% and 3.75%, respectively.

The Bank’s move was likely driven by two factors: broadening inflation and an increasingly hawkish Fed. On one hand, the Bank felt “urgent action” was needed in order to keep inflation expectations anchored amid a broadening of inflation, which threatens to lead to second-round inflation effects—where higher prices push wages higher, which fuels further price increases in a vicious cycle. On the other hand, as U.S. inflation reached the highest rate since 1981 in June, the market now expects a 100 basis point hike by the Fed in July. Such a hike would apply further downward pressure on the peso—further increasing imported inflation—giving the BSP a second reason to step in and hike rates. Finally, the Bank also noted that the strong economic growth seen thus far in 2022 meant that the economy could accommodate tighter financial conditions.

The Bank’s commentary on the direction of its future monetary policy remained hawkish, but lacked explicit forward guidance. It stated its “unwavering commitment and readiness” to make further moves to get inflation within the Bank’s 2.0–4.0% band in the medium-run.

Analysts at Nomura said:

“We revise up our terminal rate forecast of the RRP to 4.50% from 3.75% in this hiking cycle, which we expect to be reached by December’s meeting. In terms of the trajectory, we still expect a 50bp hike at BSP’s next meeting on 18 August, as we expect headline inflation to rise further above BSP’s 2-4% target and peak by October […] barring other price shocks. From there, we expect BSP to hike by 25bp in each of the remaining three meetings of the year before pausing.”

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