Monetary Board increases target RRP rate by 25 basis points

At its regular meeting on Thursday, the Monetary Board decided to take off-cycle action to raise the Bangko Sentral ng Pilipinas’ (BSP) Target Reverse Repurchase (RRP) Rate by 25 basis points to 6.50 percent, effective today, 27 October 2023.

Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 6.0 percent and 7.0 percent, respectively.

The Monetary Board recognized the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.

The latest baseline projections point to an elevated inflation path over the policy horizon as upside risks continue to manifest.

Before Thursday’s monetary policy action, the staff risk-adjusted forecast for 2024 was 4.7 percent (from 4.3 percent previously). This is well above the Government’s target range.

At the same time, second-round effects have broadened, including transportation fare increases and minimum wage adjustments. Inflation expectations have risen sharply, highlighting the risk of further second-round effects.

The balance of risks to the inflation outlook still leans significantly toward the upside, due mainly to the potential impact of higher transport charges, electricity rates, international oil prices, and minimum wage adjustments in areas outside the National Capital Region.

Meanwhile, the effect of a weaker-than-expected global recovery as well as government measures to mitigate the effects of El Niño weather conditions could temper inflationary impulses.

On the output side, recent domestic indicators point to dissipating pent-up demand in the near term. Nevertheless, the country’s medium-term growth prospects remain largely intact.

The Monetary Board is closely monitoring the impact of the increase in interest rates as these work their way through the economy. The board also continues to support fiscal efforts to sustain growth through more rapid programmed spending, as well as non-monetary interventions to address persistent supply-side pressures on prices.

The Monetary Board supports the economic managers’ timely efforts to extend the effectivity of EO 10 beyond 2023 as well as to reform the Tariff and Customs Code.

Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident.