BSP hikes borrowing rate to 4.25% with inflation seen above target until 2023

Metro Manila (CNN Philippines, September 22) — The Bangko Sentral ng Pilipinas (BSP) said Thursday it is raising its key interest rate to 4.25%, a level last seen in August 2019, to boost its fight against surging commodity prices.

The Monetary Board's widely-expected decision to hike the policy rate by 50 basis points or half a percentage point effective Friday follows its 50-bp upward adjustment in August.

Overnight deposit and lending rates were also bumped up to 3.75% and 4.75%, respectively.

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, prompting businesses and consumers alike to spend less and save more. Central banks usually hike rates to help curb accelerating inflation, or the rate of increase of commodity prices. However, too little money going around in an economy also slows it down.

The BSP sees inflation further accelerating until next year, hiking its forecasts further above the annual 2% to 4% target band.

"Price pressures may continue to emanate from the potential impact of higher global non-oil prices, pending petitions for further transport fare hikes, the impact of weather disturbances on prices of food items, as well as the sharp increase in the price of sugar," said BSP Deputy Governor Francisco Dakila Jr., citing the weaker-than-expected global economic recovery as main downside risk.

From 5.4%, the central bank expects inflation to average 5.6% this year. For 2023, it projects a 4.1% rate, a tad higher from its previous 4% estimate.

Philippine inflation has averaged 4.3% as of August, still above target.

The BSP's latest rate hike comes hours after the US Federal Reserve increased interest rates by 75 bp or three-quarters of a point for the third time. This came as US inflation rose quicker than expected in August.

The Fed's aggressive actions against rising prices have strengthened the dollar, to the detriment of the peso and other currencies in the region.

The peso sank to a new all-time low on Thursday as it closed at ₱58.49 against the greenback, breaching the record ₱58 set just a day ago.

Economists expect the BSP to continue raising rates for the rest of 2022 with rising prices and the Fed to remain hawkish.

"Against a backdrop of ongoing elevated inflation and at least further 75bps US rate hikes this year, we expect the BSP to raise rates by another 25bp at its November meeting, bringing the policy rate to 4.5% at year-end," Oxford Economics assistant economist Makoto Tsuchiya said in a note.

Meanwhile, BPI sees the central bank hiking its policy rate up to 5.25% by yearend amid "uncertainties" here and abroad pushing up commodity prices.

The BSP also downgraded its inflation forecast for 2024 from 3.2% to 3%.