Manila: Residents, businessmen and overseas Filipino workers' families may find borrowing more costly as the central bank has announced a 0.5 per cent policy rate increase on Thursday, bringing the level to 3.75 per cent, as the country's central monetary authority moves to curb inflation. The decision takes effect August 19, Friday.
Bangko Sentral ng Pilipinas (BSP) announced Thursday it is raising interest rates by 50-basis points (bp), following the Monetary Board's off-cycle increase of three-quarters of a percentage point (0.75 per cent) or 75 bp in July.
BSP Governor Felipe Medalla said the Monetary Board decided to raise interest rate on overnight reverse repurchase facility (repo) by 50 bps to 3.75 per cent, effective 19 August 2022. Interest rates on the overnight deposit and lending facilities were raised to 3.25 per cent and 4.25 per cent, respectively.
Why policy rates are important
The policy interest rate is an interest rate the monetary authority sets to influence consumer prices, exchange rate and credit expansion.
Central bank policy rates are used as reference points by banks and lending companies 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.
With the BSP's move, banks will eventually increase their own lending rates, thus making borrowing more costly. This could lead to lesser spending, slowing down demand, and ultimately resulting to low and stable inflation. However, because higher rates pull money circulating in an economy, such a move also slows down growth.
Philippine inflation — the rate at which prices of goods and services rise — jumped to 6.4 per cent in July, higher than the BSP projected and close to a four-year high.
2022 inflation rate revised upwards
The BSP targets range of 2 percent to 4 percent inflation, but in April it went 4.9 percent year-on-year, and is expected to remain higher than expected owing to high oil prices.
The BSP earlier projected average inflation for this year at 4.6 per cent. On Thursday, it was further revised upwards to 5.4 per cent.
"The inflation target remains at risk over the policy horizon owing to broadening price pressures. Elevated inflation expectations likewise highlight the risk of further second-round effects," the BSP said in a statement.
BSP Governor Felipe Medalla, however, told local media the country’s economy is on a stronger footing to cushion the impact of another policy rate increase.
Inflationary factors
"Upside risks also continue to dominate the inflation outlook up to 2023 due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases," the BSP stated.
Meanwhile, the impact of a weaker-than-expected global economic recovery as well as the resurgence of local COVID-19 infections continue to be the main downside risks to the outlook.
On July 14, the BSP’s Monetary Board raised interest rate on the BSP's overnight reverse repurchase facility by 75 basis points to 3.25 per cent following an earlier move in May, when the BSP raised its policy rate for the first time in over three years.
Given the moderation in economic activity in recent months, the central bank noted that overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit.
"For these reasons, the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon."
What higher policy rates mean
By raising rates — and the cost of borrowing — the monetary authority seeks to temper consumer demand to address the sharp spikes in prices as higher inflation rate could derail the economy’s recovery.
Gross domestic product grew 8.3 per cent year-on-year in the first quarter, smashing expectations despite the Omicron onslaught at the start of the year. It grew 7.4 per cent in the second quarter of 2022.
The policy interest rate is an interest rate that the monetary authority (i.e. the central bank) sets to influence the evolution of the main monetary variables in the economy, such as consumer prices, exchange rate or credit expansion, among others.
When the central bank puts money into the system by buying or borrowing securities, colloquially called "loosening" policy, the rate declines.
Inflation forecasts for 2023 and 2024 have declined to 4 per cent and 3.2 per cent, respectively.
He previously served as the 9th Socio-Economic Planning Secretary and Director-General of the National Economic and Development Authority (Neda) under President Joseph Estrada.
Medalla served as dean of the University of the Philippines School of Economics. He earned his Ph.D. in economics from Northwestern University in Evanston, Illinois in 1983.
Dr. Medalla is the ex officio chairman of the Anti-Money Laundering Council, the central anti-money laundering/counter-terrorism financing authority of the Philippines. He previously served as the 9th Socio-Economic Planning Secretary and Director-General of the National Economic and Development Authority (Neda) under President Joseph Estrada.
Medalla served as dean of the University of the Philippines School of Economics. He earned his Ph.D. in economics from Northwestern University in Evanston, Illinois in 1983.
