The Bangko Sentral ng Pilipinas (BSP) recently raised its overnight reverse repurchase (RRP) rate by 50 basis points to 6.00%, marking the eighth consecutive increase since May of last year. This was not unexpected, as the January Consumer Price Index (CPI) report highlighted that stronger-than-expected inflation and fourth quarter GDP outturns have cemented the case for a more restrictive monetary policy setting. The cumulative tightening of monetary policy by 400 basis points is the most aggressive since 2000.
The Monetary Board (MB) judged that a strong follow-through monetary policy response was necessary to reduce the risk of a breach of the inflation target in 2024. This is due to the fact that consumer price inflation is projected to average 6.1% this year, an upward revision from the BSP’s previous forecast of 4.5% in December 2022. The MB also wished to prevent inflation expectations from drifting further away from the 2.0%-4.0% target band, as well as contain demand-side pressures and second-round effects without unduly hindering the sustained momentum of economic growth.
In light of this, UOB Group Economist Loke Siew Ting now expects the BSP to jack up its RRP rate to 6.75% by the middle of this year, as opposed to the previous estimate of 6.00% by the first quarter of 2023. This revision of the timeline is mainly due to an upward revision in inflation projection last week for the Philippines this year, as well as a revised timeline for the US Federal Reserve rate to peak in the second quarter of 2023.
Following the most aggressive interest rate hikes since last year and moderate growth prospects, Loke believes that a consistent gradual slowdown in inflation will allow the BSP to take a pause on its rate hikes in the second half of 2023, keeping the RRP rate at 6.75% until the end of the year.
The recent increase in the BSP’s overnight reverse repurchase rate is indicative of the growing concern for inflation in the Philippines. This is due to the fact that inflation is projected to average 6.1% this year, an upward revision from the BSP’s previous forecast of 4.5% in December 2022. The Monetary Board judged that a strong follow-through monetary policy response was necessary to reduce the risk of a breach in the inflation target in 2024. This is to prevent inflation expectations from drifting further away from the 2.0%-4.0% target band, as well as to contain demand-side pressures and second-round effects without unduly hindering the sustained momentum of economic growth.
UOB Group Economist Loke Siew Ting now expects the BSP to jack up its RRP rate to 6.75% by the middle of this year, as opposed to the previous estimate of 6.00% by the first quarter of 2023. This revision of the timeline is mainly due to an upward revision in inflation projection last week for the Philippines this year, as well as a revised timeline for the US Federal Reserve rate to peak in the second quarter of 2023.
The cumulative tightening of monetary policy by 400 basis points is the most aggressive since 2000. This is to ensure that the inflation target of 2.0%-4.0% is not breached in 2024, and to also ensure that demand-side pressures and second-round effects are contained without unduly hindering the sustained momentum of economic growth.
Although the BSP’s rate hikes have been aggressive, Loke believes that a consistent gradual slowdown in inflation will allow the BSP to take a pause on its rate hikes in the second half of 2023, keeping the RRP rate at 6.75% until the end of the year. This is due to the fact that moderate growth prospects should be able to keep inflation in check and prevent it from breaching the 2.0%-4.0% target band.
In conclusion, the recent increase in the BSP’s overnight reverse repurchase rate is indicative of the growing concern for inflation in the Philippines. UOB Group Economist Loke Siew Ting believes that the BSP will jack up its RRP rate to 6.75% by the middle of this year, and then take a pause on its rate hikes in the second half of 2023, keeping the RRP rate at 6.75% until the end of the year. This is to ensure that the inflation target of 2.0%-4.0% is not breached in 2024, and to also ensure that demand-side pressures and second-round effects are contained without unduly hindering the sustained momentum of economic growth.
