BSP makes jumbo rate hike to temper high prices, prop peso up

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Metro Manila (CNN Philippines, November 17) — The Bangko Sentral ng Pilipinas (BSP) delivered a strong policy response on Thursday in a bid to temper high prices and prop the peso up against the dollar.

The policy-making Monetary Board (MB) announced its decision to jack up the cost of borrowing by 75 basis points (bp) or three-quarters of a percentage point, keeping its earlier pronouncement of matching the US Federal Reserve's aggressive stance against high inflation rate.

This bumps up the key interest rate to 5%, effective Friday, Nov. 18. The increase comes after the 50-bp hike in September.

The MB also raised interest rates on overnight deposit and lending facilities to 4.5% and 5.5%, respectively.

Higher interest rates impact consumer loans, credit card, and deposit interest. This means Filipinos wanting to own cars, houses, or avail of business capital, among others, would have to deal with more costly borrowing.

In turn, businesses and consumers are seen to spend less.

BSP Governor Felipe Medalla said imposing a higher interest rate would help the peso, which has been depreciating against the greenback to as low as ₱59:$1 in October.

"Very small difference in policy rates of the BSP and the Fed could result in a very weak peso," the central bank chief said.

"Right now, the US policy rate is a bigger influencer of our policy rate than normal," he added.

Medalla said the peso-dollar exchange rate would not have been a cause for concern as long as inflation was within target.

The country's inflation rate hit 7.7% in October, the highest in almost 14 years.

READ: Filipinos battle steep prices with October inflation highest since 2008

On the possibility of inflation reaching 8% in the last two months of the year, Medalla said he would "bet a lot that it will not exceed 8%."

"Even if it does, it will start going down by next year," he added.

Meanwhile, the BSP also bared its adjusted inflation forecast: from 5.4% to 5.8% in 2022; from 4% to 4.3% in 2023; and from 3.2% to 3.1% in 2024.

Asked if the Philippines would continue to match the US Fed's decisions, Medalla said there might be a sign of slowing down.

"We're slowly going back to a more normal global interest rate environment. We will probably do less," he said.

Medalla said despite the increase in policy rates, the country’s growth remains "very feasible."

Official data last week showed that the country was on track to achieving its economic growth target for the year after the third quarter performance beat expectations.

The Philippine economy expanded by 7.6% for the period from a year earlier, even faster than the revised 7.5% in the second quarter.

Socioeconomic Planning Secretary Arsenio Balisacan earlier expressed bullishness that the country can meet the 6.5-7.5% growth target this year.

READ: PH beats Q3 economic growth forecasts despite inflation woes