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Philippines Monetary Policy March 2023

Philippines: Central Bank tightening shifts into lower gear in March

At its 23 March meeting, the Bangko Sentral ng Pilipinas (BSP) raised the overnight reverse repurchase facility rate by 25 basis points to 6.25%—a smaller increase than February’s 50 basis points. Concurrently, the rates on the overnight deposit and lending facilities—which establish the floor and ceiling of the interest rate corridor—were increased to 5.75% and 6.75%, respectively. The decision was in line with market expectations.

The BSP was motivated to raise rates further, even as some regional peers have paused their tightening cycles, due to sustained growth in core inflation. February’s inflation print revealed strong underlying dynamics in domestic demand and persistent supply shocks, which threaten to fan price pressures for longer. The Bank continued to see the 2023 headline rate averaging above the 2.0–4.0% target band. Lastly, risks remained skewed to the upside, with rising transport and electricity prices, supply shortages affecting domestic food prices and above-average wage adjustments clouding the inflation outlook significantly.

In its forward guidance, the Bank reiterated its data-driven approach and emphasized that “monetary authorities remain ready to respond further to inflation risks”. The BSP might pause its tightening cycle in May due to global banking woes dampening economic growth prospects and if inflation shows consistent signs of moderation. However, stronger-than-expected domestic demand and the spread of swine fever in April might push inflation further up, prompting additional rate hikes; the Consensus among our analysts is for another 25 basis point increase in Q2.

The next monetary policy meeting is set for 18 May.

ING economist Nicholas Mapa commented on the outlook:

“Barring any fresh supply-side shocks […], we believe that BSP will be open to shifting to a pause at its May meeting. Meanwhile, if inflation sustains its downward trajectory, the BSP may even opt to lower the reserve requirement ratio (RRR) and the central bank will have inflation data for both March and April to digest ahead of the 18 May policy decision.”

In contrast, Nomura analysts Euben Paracuelles and Rangga Cipta expect more hikes from the BSP:

“Because of our forecast that headline inflation will remain well above BSP’s 2-4% target in the next few months and importantly, that core inflation momentum will still be relatively strong, we reiterate our forecast of another 50bp in rate hikes to 6.75%, with BSP delivering 2x25bp hikes in the next two meetings before pausing.”

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