MONETARY authorities raised key interest rates by another quarter-point on Thursday, citing the need to combat persistent inflationary pressures.
The Bangko Sentral ng Pilipinas’ (BSP) benchmark rate now stands at 4.75 percent while those for its overnight deposit and lending facilities are at 4.25 percent and 5.25 percent, respectively.
“In light of the most recent data, the Monetary Board decided that monetary tightening is still warranted,” BSP Governor Eli Remolona Jr. told reporters.
“Today’s (Thursday’s) policy action will help keep inflation expectations anchored and will mitigate the risk of second round effects,” he added.
Remolona said monetary authorities “will continue to be vigilant and guided by incoming data.”
The central bank chief noted that the economy had been hit by a global energy shock that was lasting longer than expected. While the US and Iran have reached a peace deal that will reopen the vital Strait of Hormuz, he added that it would still take several months to rebuild disrupted infrastructure before oil prices can return to pre-conflict levels.
“Given the uncertainty, [it] depends on the kind of uncertainty you face, you might want a bigger hike because you want to prevent the anchoring of inflation,” Remolona said.
“But if that’s not a big issue, and for now it’s not a big issue, then you could go with what I call baby steps, so that if something unexpected happens, you can always adjust.”
The policymaking Monetary Board, he continued, “can always have an off-cycle meeting.”
“We can do 50 basis points if necessary,” Remolona said.
Most analysts had said that a 25-basis point hike was likely but others argued that a 50-bps adjustment was necessary to forestall complications down the road.
Remolona, however, said: “The problem with big moves is it tends to disturb the markets if you reverse them, so it’s better to do small moves in the same direction than a big move up and then a big move down.”
Inflation risks persist
BSP Deputy Governor Zeno Ronald Abenoja said inflation could remain above the 2.0- to 4.0- percent target until next year.
The central bank further raised its inflation projection to 6.4 percent this year from 6.3 percent. That for next year was also raised to 4.5 percent from 4.3 percent.
Abenoja said inflation was likely to return to within the target range in 2028 at 3.1 percent.
“What is relevant here for monetary policy is essentially the next two to three-year horizon,” he said.
“We are already halfway through 2026 and monetary policy works with a lag. But as we can see in the forecast, it will be about 24 months, about two years, 2026 and 2027, that the average inflation could be beyond the tolerance range.”
Second-round effects, meanwhile, are now appearing faster compared to 2022, Remolona said.
He noted that in 2022, when Russia’s invasion of Ukraine also led to an energy shock, the effects took longer to show up.
The current situation, he said, increases the risk that inflation expectations will become less firmly anchored.
“We are prepared to take further monetary action to ensure that inflation returns to the 3.0 percent target,” Remolona said.
