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The Bangko Sentral Ng Pilipinas (BSP) joined the regional monetary policy tightening trend in yesterday’s meeting. It raised the key policy rate by 25bps to 2.25% from a record low of 2.0%, aiming to proactively combat inflation concerns amid stronger than expected 1Q22 economic growth and labour market improvement. Yesterday’s move marked the first hike since late-2018.
The BSP said that it will continue with gradual withdrawal of its extraordinary liquidity interventions and normalisation of policy settings. The timing and pace will however be data dependent. This suggests that the BSP would avoid hiking by 50bps in a single meeting like in 2018, which might hurt the economy at a period of elevated external uncertainty. With the BSP appearing geared towards fighting inflation as reflected in yesterday’s decision, we think there is a reasonable likelihood for policymakers to remain relatively hawkish, and potentially adopt back-to-back rate hike in the June meeting. Factors to consider include the BSP’s intent to arrest upside and persistent inflation risks; anchor inflation expectations; policymakers’ expectations for a durable economic recovery, which can potentially spark further demand-pull inflation; and a weak peso. Real interest rates are also very negative based on our estimates.
Philippines’ headline inflation already exceeded the BSP’s 2-4% target in April, printing at 4.9% YoY. Other than supply-driven upside price pressures from elevated commodity prices, the BSP appeared to be concerned about second-round effects from the recent minimum wage hikes in some regions. The Monetary Board therefore viewed yesterday’s increase as timely to ‘arrest further second-round effects and temper the build-up in inflation expectations.’ The authorities are expecting headline inflation to stay above 5% YoY in the coming months before easing in 2023. The BSP raised its headline inflation forecasts for 2022 and 2023 to 4.6% and 3.9%, respectively (from 4.3% and 3.6% in March’s meeting). Despite the upward revisions, policymakers still see upside risks for both years.
Beyond raising the policy rate, the central bank also withdrew other unconventional pandemic-era measures. First, the National Government will fully settle the provisional advances provided by the BSP on 20 May 2022, around one month ahead of the maturity schedule of 11 June 2022. Second, the BSP recalibrated its government bond purchase window away from a crisis intervention measure to a regular liquidity facility to manage domestic liquidity. The banking system is seeing ample liquidity even as overall credit growth is recovering and trending higher.
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