Philippines: Another 75 bps rate raise by the BSP – UOB

Senior Economist at UOB Group Julia Goh and Economist Loke Siew Ting assess the recent BSP event.

Key Takeaways

“Bangko Sentral ng Pilipinas (BSP) raised its policy rates by 75bps today (17 Nov), as pre-announced by BSP Governor Felipe Medalla on 3 Nov. With effect from tomorrow (18 Nov), the overnight reverse repurchase (RRP) rate will be raised to 5.00%, the overnight deposit rate will be hiked to 4.50%, and the overnight lending rate will be raised to 5.50%, marking the highest level since Feb 2009.”

“The central bank stated that this outsized interest rate hike is necessary given the increased likelihood of further second-round effects, persistent inflationary pressures, and the predominance of upside risks to the inflation outlook. Recognizing the upside risks, BSP tweaked its headline inflation projections higher over the policy horizon -- 5.8% for 2022 (from 5.6% previously, UOB est: 5.5%), 4.3% for 2023 (from 4.1% previously, UOB est: 4.5%), and 3.1% for 2024 (from 3.00% previously, UOB est: 3.5%).”

“In today’s monetary policy statement, BSP also reiterated its primary mandate of keeping price and financial stability. It will continue to take all necessary actions to bring inflation back within the target band over the medium term. This indicates that BSP still stays in a rate hike mode. Moreover, we believe that the US Fed’s rate hike trajectory also matters to BSP in deciding its own monetary policy stance over the next couple of months. We reiterate our call for a 50bps hike in the RRP rate to 5.50% next month (on 15 Dec), followed by a 25bps rate increase each in Feb and Mar next year. This will bring the RRP rate to 6.00% by 1Q23 and holding at this 6.00% terminal rate thereafter until the end of 2023.”