BSP hikes borrowing rate to 3.75%, sees higher inflation in 2022 before slowdown

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Metro Manila (CNN Philippines, August 18) — The Bangko Sentral ng Pilipinas (BSP) raised the cost of borrowing on Thursday by half of a percentage point to 3.75% as it continues cracking down on surging commodity prices.

The 50-basis point key interest rate hike which takes effect Friday comes after the Monetary Board's off-cycle increase of three-quarters of a percentage point or 75 bps in July.

Overnight deposit and lending rates were also increased to 3.25% and 4.25% respectively, said BSP Governor Felipe Medalla.

Banks and lending companies turn to central bank rates as a benchmark for their loan, credit card, and deposit rates. Higher rates mean it will cost more to borrow, in turn prompting businesses and consumers alike to spend less and save more.

Central banks usually hike rates to help curb accelerating inflation. However, too little money circulating in an economy also slows it down.

The BSP now expects inflation to average 5.4% in 2022, further above its prior 5% forecast and target band of 2-4% for the year.

Inflation, or the rate at which prices of goods and services rise, sped to a fresh nearly four-year high of 6.4% in July, still above target.

However, the central bank sees slower rates in the next two years. From 4.2%, it projects inflation to ease to 4% in 2023 and 3.2% the year after, compared to its prior 3.3% estimate for 2024.

With food prices still the main driver of inflation, Medalla supports easing import restrictions. He said the National Economic and Development Authority is coming up with a strategy allowing food processors to import needed sugar supply.

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Medalla added that while it's impossible for policy tightening not to reduce economic growth, "respectable growth is still possible" even if the BSP takes further steps ahead.

The economy grew 7.4% in the second quarter, slowing from 8.2% in the first three months of 2022. First-half growth stood at 7.8%, slightly above the economic team's 6.5-7.5% target.