Monetary Board raises interest rates by 25bp

PHILIPPINES - In Brief 23 Mar 2023 by Romeo Bernardo

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As Governor Felipe Medalla signaled earlier, the Monetary Board raised its set of policy rates by 25bp, bringing the overnight borrowing rate to 6.25% effective tomorrow. Per the Governor, the decision to increase policy rates was mainly influenced by still rising core inflation in February, still elevated inflation expectations given the many upside risks (food cost, transport fares, electricity rates and wages) and “preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in advanced economies.” He refrained from giving further guidance on the Monetary Board’s next policy move emphasizing that it will be data dependent, the key data being domestic inflation. As an example, he said that if the month-on-month inflation turned negative in March, the Monetary Board may pause its tightening action. The BSP tweaked its inflation forecast, reducing the average to 6% for 2023 (from 6.1% previously) and 2.9% for 2024 (from 3.1% previously), in part reflecting the cumulative impact of BSP policy rate adjustments. Asked about the banking problem in advanced countries, Governor Medalla said that it is not an important factor in monetary authorities’ decision-making at this time citing the following differences between US and local banks: (a) the increase in policy rates in the US had an outsized impact on bond prices, and thus banks’ asset value, given the very low interest rate regime prevailing before the Fed started raising rates last year, (b) local banks hold a larger proportion of their assets in loans compared with government securities but even in a credit event, banks have high capital adequacy r...