Monetary Board raises policy rate by 50 basis points
At its meeting on monetary policy Thursday, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 50 basis points to 6.0 percent, effective February 17.
Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 5.5 percent and 6.5 percent, respectively.
In deciding to raise the policy interest rate anew, the Monetary Board noted that the latest baseline inflation forecast path has shifted higher relative to the previous assessment.
Average inflation is projected to breach the upper end of the 2-4 percent target range at 6.1 percent in 2023, before returning to within target at 3.1 percent in 2024.
The forecasts were adjusted upwards following the higher-than-expected inflation outturn in January as well as the continued stronger rebound in domestic demand and gross domestic product (GDP) growth in fourth quarter of 2022.
Both headline and core inflation measures have also continued to increase, indicating a further broadening of price pressures, particularly in services. Meanwhile, inflation expectations have likewise risen further, underscoring the need to preempt the emergence of further second-round effects.
At the same time, the balance of risks to inflation now leans toward the upside for both 2023 and 2024, with pressures emanating from the potential impact of global food market uncertainties, continued domestic shortages in key food items, additional transport fare hikes amid elevated oil prices, and the higher-than-expected wage adjustments in 2023.
Meanwhile, the impact of a weaker-than-expected global economic recovery remains the primary downside risk to the inflation outlook.
The Monetary Board also reiterates its encouragement and support for timely and more aggressive whole-of-government actions to mitigate the impact of persistent supply-side pressures on food prices, including trade?positive measures and significant progress to boost productivity.
Given these considerations, the Monetary Board deems a strong follow-through monetary policy response as necessary to reduce the risk of a breach in the inflation target in 2024.
An upward adjustment in the policy interest rate would also prevent inflation expectations from drifting further away from the target band.
The Monetary Board also believes that, with domestic growth exceeding expectations in 2022, monetary action can help to dampen potential demand-side pressures and second-round effects without unduly hindering the sustained momentum of economic growth.
The BSP reassures the public that it stands ready to take all necessary policy action to bring inflation to within the 2-4 percent government target over the medium term, in line with its primary mandate of ensuring price stability. BSP
