BSP hikes interest rate to 3.25% in unexpected move to arrest inflation

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Metro Manila (CNN Philippines, July 14) — The Bangko Sentral ng Pilipinas has raised its key interest rate by 75 basis points or three-quarters of a percentage point, bringing it to 3.25% effective July 14 as it cracks down on surging inflation.

BSP Governor Felipe Medalla announced the off-cycle hike on Thursday morning, also revealing the overnight deposit and lending rates have been increased to 2.75% and 3.75% respectively.

“In raising the policy interest rate anew, the Monetary Board recognized that a significant further tightening of monetary policy was warranted by signs of sustained and broadening price pressures amid the ongoing normalization of monetary policy settings,” said Medalla.

In an afternoon briefing, BSP Deputy Governor Francisco Dakila Jr. said this is the largest rate hike the central bank has carried out so far. The last time the Monetary Board implemented an out-of-schedule policy action was on April 16, 2020 where rates were slashed by half a point to 2.75%.

Several major central banks, including the United States Federal Reserve, have been aggressively hiking rates to arrest rising inflation in their countries.

In the Philippines, inflation sizzled to 6.1% in June — its fastest in almost four years. This brought average inflation for the first half of 2022 to 4.4%, further above the central bank’s 2-4% goalposts for the year.

The BSP chief likewise mentioned the strong growth rebound observed so far suggests the economy can handle further policy tightening.

Philippine gross domestic product (GDP) grew 8.3% in the first quarter, outpacing market forecasts and the 7.8% pace in the last three months of 2021.

“By taking urgent action, the Monetary Board aims to anchor inflation expectations further and temper mounting risks to the inflation outlook. In particular, policy action is intended to help manage spillovers from other countries that could potentially disanchor inflation expectations,” said Medalla.

The BSP began its hiking cycle in May, when it raised rates by a quarter of a point — a move it repeated in June.

Last week, Medalla announced central bank officials are ready to hike by half a point in the next policy meeting in August with the peso closing above the ₱56-per-dollar mark—the weakest since September 2005.

With this, economists have dubbed today's rate hike a surprise move.

"Today's decision marks a significant shift in the BSP's preference for a gradual normalisation of monetary policy. Broadening domestic price pressures and spillover effects from the global economy were cited as the main reasons for the off-cycle hike," said ANZ Research in a note.

Both the Australian think tank and United Kingdom-based Capital Economics cited worries over further monetary policy tightening in the US — especially with inflation hitting a new four-decade high — and the dollar further strengthening against the peso as other factors.

"However, we think the tightening cycle will prove relatively short-lived. While inflation is likely to remain elevated for the next few months, it should peak soon," said Capital Economics senior Asia economist Gareth Leather, noting the expected fall in energy price inflation and recent declines in global commodity prices.

Meanwhile, the Bank of the Philippine Islands said the economy could slightly ease due to higher interest rates but could be worse if inflation continues to quicken.

"A prolonged period of high inflation will eventually hurt consumers, which will likely affect the economy more severely compared to higher interest rates," said BPI, also pushing for a "more aggressive" policy rate adjustment to prevent excessive movements in the exchange rate.

BSP officials stressed the policy meeting scheduled on August 18 will still push through, where revisions to full-year inflation forecasts will likewise be revealed.

How will rate hikes affect me?

Banks and lending companies turn to BSP rates as a benchmark for their loan, credit card, and deposit rates.

So simply put: 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 going around in an economy also slows it down — so there are questions on how rate hikes will impact domestic output.