Policy rates up by 50bp

PHILIPPINES - In Brief 16 Dec 2022 by Romeo Bernardo

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As widely expected, the Monetary Board of the BSP raised its set of policy rates by 50bp effective tomorrow. This brings the key overnight rate to 5.5%, the highest since end-2008. During the Q&A, BSP Governor Felipe Medalla said that there is no basis for ruling out further rate increases next year but reiterated that any policy action will be data dependent. He added that with reduced pressure on the peso, which has appreciated from close to P59/$ to below P56/$ this week, monetary authorities are less concerned now about interest rate differentials, and thus would not necessarily match US Fed hikes going forward. Governor Medalla previously said that a differential of at least 100bp between local and US policy rates is needed to maintain exchange rate stability. While keeping its 5.8% inflation forecast this year, the BSP raised its forecast for 2023 from 4.3% to 4.5%. It expects inflation to peak in December but remain elevated through 1H 2023, with risks still on the upside. We expect 2023 inflation to average 4.8%, higher than the BSP’s forecast. Although the combination of softening oil prices, peso appreciation as well as the cumulative impact of interest rate hikes will help tame inflation pressures, continuing uncertainty on food import policies, scheduled increases in water rates in the Metro Manila area and recent developments in the electricity market are countervailing factors. The latter is in connection with the suspension of a 670MW Power Supply Agreement between the biggest electricity distributor in the Luzon grid and one of its suppliers, forcing the former to source higher-priced emergency supply from alternative sources, including the spot market.