Monetary Board Hikes Policy Rate by 50 Basis Points

At its meeting on monetary policy today, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 50 basis points to 4.25 percent, effective tomorrow, 23 September 2022. Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 3.75 percent and 4.75 percent, respectively.

The BSP’s latest baseline forecasts show that average inflation is still projected to breach the upper end of the 2-4 percent target range at 5.6 percent in 2022. The forecast for 2023 has also increased slightly to 4.1 percent. Meanwhile, the forecast for 2024 eases to 3.0 percent.

In deciding to raise the policy rate anew, the Monetary Board noted that price pressures continue to broaden. The rise in core inflation indicates emerging demand-side pressures on inflation. Moreover, second-round effects continue to manifest, with inflation expectations remaining elevated in September following the approved minimum wage and transport fare increases. Nonetheless, inflation expectations continue to be broadly anchored over the medium term.

The risks to the inflation outlook remain tilted toward the upside until 2023 and broadly balanced in 2024. Price pressures may continue to emanate from the potential impact of higher global non-oil prices, pending petitions for further transport fare hikes, the impact of weather disturbances on prices of food items, as well as the sharp increase in the price of sugar. Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the main downside risk to the outlook.

Given elevated uncertainty and the predominance of upside risks to the inflation environment, the Monetary Board recognized the need for follow-through action to anchor inflation expectations and prevent price pressures from becoming further entrenched. The domestic economy can accommodate a reasonable tightening of the monetary policy stance, as demand has generally held firm owing to improved employment outturns and ample liquidity and credit.

At the same time, the Monetary Board also continues to urge the National Government to implement timely non-monetary interventions to mitigate the impact of persistent supply-side pressures on food and other commodity prices.

The BSP reiterates its commitment to take all necessary actions to steer inflation towards a target-consistent path over the medium term, consistent with its primary mandate to promote price and financial stability.