By Aaron Michael C. Sy, A reporter
THE PHILIPPINE central bank has raised benchmark interest rates for the first time in more than two years, while indicating that a “modest” interest rate hike may follow to protect against rising rates due to the Iran war.
The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) raised the target repo rate by 25 basis points (bps) to 4.5% at its policy meeting on Thursday, effectively ending a tapering cycle that lowered the benchmark rate by 225 bps from August 2024.
The central bank also adjusted interest rates on its overnight deposits and lending facilities to 4% and 5%, respectively.
“Once we start raising the policy rate, we may raise it again,” BSP Governor Eli M. Remolona, Jr. he told a press conference after the policy decision. “That's a better strategy than picking it up once and climbing the mountain instead.”
He noted that the monetary policy includes “several steps” to reduce economic disruption.
The decision was in line with the expectations of 11 out of 19 analysts polled by BusinessWorld last week.
It followed an off-cycle meeting last month where the BSP held rates steady as it tried to calm markets amid growing uncertainty.
Mr. Remolona said the central bank has increased borrowing costs to keep expectations of deflation strong and contain the accumulation of adverse effects.
“Inflation expectations continue to rise, increasing the risk that they will miss our targets,” he said. “This could cause inflation to continue, hurting households and businesses.”
The BSP raised the policy rate based on the assumption that oil futures will remain high in the near term, at prices of around $100 a barrel, before gradually decreasing by the end of the year and continuing into 2027.
Mr. Remolona said the commodity panic has already affected the prices of certain items in the consumer price index.
“Right now, yes, it's a global supply shock,” he said. “But we're starting to see bleeding into other items in the consumer basket. And the prices of those other items are being affected by domestic demand.”
In March, headline inflation rose to a nearly two-year high of 4.1%, faster than the BSP's forecast of 3.1%-3.9% and the 2%-4% annual target.
The decision to raise the interest rate was not unanimous, said Mr. Remolona, adding that the BSP considered a 50-bp rate hike but decided against it to avoid any major moves.
Clear evidence of a sharp and prolonged increase in oil prices expected to curb inflation would require a major hike, he added.
The central bank now expects inflation to fall to 6.3% this year and 4.3% next year, both above its 4% ceiling, before returning to the tolerance level in 2028.
“It will remain above 5% for most of this year,” said BSP Vice Governor Zeno Ronald R. Abenoja at the same briefing. “We don't think it will cut the anchor, but if it is possible it will remove the anchor, we will have to change our strategy.”
'TOLERANCE DISTANCE'
Mr. Remolona said the BSP will have to increase borrowing costs gradually to avoid a slowdown in economic growth.
“The idea is not to get it back within tolerance immediately,” he said. “Because if we try to do that, it means that it is very expensive for the economy. What we want is to reduce the level of tolerance at the right time without damaging the economy too much.”
In a separate statement, the central bank said inflation had worsened due to the war in the Middle East, which had pushed up oil and fertilizer prices around the world.
These increases have started to feed into domestic fuel and food costs, adding pressure to consumer prices.
At the same time, core inflation, which excludes volatile food and energy items, continued to rise, reflecting price pressures across the economy.
The BSP said its latest projections show higher inflation, with average inflation expected to exceed the 4% ceiling of the target range in both 2026 and 2027.
Inflation expectations have also risen, raising the risk that price pressures could intensify if left unchecked.
“After considering its options, the Monetary Board has deemed it necessary to take timely and proactive policy action to safeguard price stability,” the central bank said.
The BSP said the rate hike is aimed at underpinning inflation expectations and preventing second-round effects, such as higher fares and wages, from further pushing up prices.
“A moderate increase in the policy rate will still be consistent with economic recovery in the medium term,” it added.
The BSP also said that future policy decisions will be guided by incoming data, especially developments in inflation and global conditions.
It added that it is ready to take further monetary measures as needed to return inflation to the 3% target, which is in line with its mission to maintain stable prices.
Reyes Tacandong & Co. Senior Advisor Jonathan L. Ravelas in a Viber message said that strengthening the BSP's move will support market sentiment and the peso.
Some analysts said the hike could be a “one-and-done” rate hike, citing risks to growth, reducing volatility in global crude oil prices and ending hostilities between the US and Iran.
“Risks are on the upside if inflation expectations show strong signs of easing,” Oxford Economics economist Jun Hao Ng said in a statement.
Pantheon Macroeconomics Emerging Asia Economist, Miguel Chanco, said the medium-term outlook for global oil prices has eased, while local pump prices have also fallen.
“The Board's next move is likely to cut the rate at this time next year, when these external price shocks begin to decline in the context of year-on-year inflation,” he added. – with Norman P. Aquino
