Policy rates up by another 50bp

PHILIPPINES - In Brief 16 Feb 2023 by Romeo Bernardo

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Following surprisingly strong January inflation, the Monetary Board today decided to raise its set of policy rates by 50bp, bringing the key overnight rate to 6% effective tomorrow, the highest since 2008. The BSP also raised its inflation forecast for the year sharply from 4.3% to 6.1% while keeping next year’s forecast at 3.1%. Following this forecast, the inflation path is expected to be elevated in the 1H, i.e., averaging over 7%, before falling back to target in 4Q. This path considers the time lag for recent government decisions to relax imports of key food items to ease supply shortages. In his statement and at the press briefing, Governor Felipe Medalla signaled the high likelihood of another rate increase in the policy board’s meeting next month. The Governor noted that inflation expectations have increased “underscoring the need to preempt the emergence of further second-round effects.” Likewise, he observed broadening price pressures driven by both supply and demand factors and warned of various upside risks to the 6.1% forecast, including “potential impact of global food market uncertainties, continued domestic shortages in key food items, additional transport fare hikes amid elevated oil prices, and the higher-than-expected wage adjustments in 2023.” As to the possibility of a cut in the reserve requirement ratio in the 1H, the Governor said that it is still feasible if the BSP is sure that the last of the policy rate increases is done. We are currently updating our set of forecasts. At this time, given early indications that domestic economic growth momentum is continuing through 1Q 2023 and government’s slow response in easing food supply constraints, we...