Philippines 10-Year Bond Yield (%, eop)

Central Bank continues outsized rate hikes in February

The Bangko Sentral ng Pilipinas (BSP) raised the overnight reverse repurchase facility rate by 50 basis points to 6.00% at its 16 February meeting. Concurrently, the rates on the overnight deposit and lending facilities—which establish the floor and the ceiling of the interest rate corridor—were increased to 5.50% and 6.50%, respectively. Markets had largely priced in February’s decision.

The BSP remained hawkish, even as regional peers halted their monetary policy tightening cycles. Inflation forecasts for 2023 were revised upward due to stronger-than-expected price growth in January. Thus, the Bank saw 2023’s headline rate averaging above its 2.0–4.0% tolerance band, prompting the rate increase. Resilient domestic demand, Q4’s robust GDP print and rising inflation expectations further motivated the Bank to tighten the economy’s belt.

In its communiqué, the Bank reiterated “its encouragement and support for timely and more aggressive whole-of-government actions to mitigate the impact of persistent supply-side pressures on food prices.” This suggests the Bank’s current policy rate may not be enough to rein in inflation on its own. As such, it expressed its willingness to take “all necessary policy action” to ensure price normalization.

Our panelists are currently revising their forecasts to reflect the BSP’s latest move ahead of the next monetary policy meeting on 23 March.

ING economist Nicholas Mapa commented on the outlook:

“BSP’s latest inflation forecast and admission that price pressure has broadened could open the door for additional rate hikes in the coming months. […] Given this new information and the obvious shift in tone from Governor Medalla, we now expect a 25bp rate hike by the BSP at the March meeting with our forecast for BSP’s terminal rate at 6.25%.”