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Central Bank delivers another 50 basis point hike in September

At its meeting on 21 September, the Bangko Sentral ng Pilipinas (BSP) mirrored its August move and raised the overnight reverse repurchase facility rate by 50 basis points to 4.25%—in line with market expectations. 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 3.75% and 4.75%, respectively.

The Bank’s latest annual inflation forecasts painted a bleak picture and motivated the hike. The headline rate is not seen returning within the Bank’s 2.0–4.0% target range until 2024; it is forecast to average 5.6% in 2022 and 4.1% in 2023. In addition, the BSP noted that demand-side pressures are mounting in light of rising core inflation. Additionally, second-round effects are taking hold: The minimum wage and transport fares have already increased in response to the inflation spike. Lastly, improving employment and financial flow figures provided ample room for the rate hike.

In its communiqué, the Bank urged the government to pursue non-monetary policies to curb the impact of persistent supply-side shocks to food and energy prices. At the same time, it reiterated its “commitment and readiness to take all necessary actions to steer inflation towards a target-consistent path over the medium term”. In turn, the majority of our panel anticipates additional tightening by the end of the year.

The next monetary policy meeting is set for 17 November.

Commenting on the scope for future monetary policy interventions, analysts at the EIU said:

“There are two more monetary policy meetings this year, on 17 November and 15 December. EIU forecasts that the central bank will sanction further increases in the overnight reverse repurchase facility at both meetings, which will take the rate to 4.75% by the end of the year.”

Nomura’s Rangga Cipta and Euben Paracuelles further commented on the impact of inflation on the BSP’s upcoming decisions:

“We raise further our 2022 CPI inflation forecast to 5.5% (was 5.3%), well above the? 2.0–4.0% target of [the BSP] and still mainly driven by high food and energy prices. We also see core inflation holding up, with signs of second-round effects, including spillover effects from the recently approved transport fare hikes and stronger demand for wage increases. […] With our higher inflation forecasts and BSP delivering another 50bp hike in September to 4.25%, we now see the policy rate being hiked to 5.0% by year-end, which we view as the terminal rate in this cycle (was 4.5%).”

Our panel sees the reverse repurchase rate ending 2022 at 4.29% and 2023 at 4.25%.