By Katherine K. Chan, A reporter
BANGKO SENTRAL ng Pilipinas (BSP) raised prices for the second consecutive meeting on Thursday and signed more measured increases in between increasing the effects of the oil shock from the war in the Middle East.
The Monetary Board raised the target repurchase rate by 25 basis points (bps) to 4.75%, the same as the benchmark rate set for October 2025. This was the highest rate in almost a year or since 5% in August last year.
Rates on overnight deposits and borrowing facilities were also hiked by 25 bps each to 4.25% and 5.25%, respectively.
The latest move by the BSP was in line with the speculation of 15 out of 20 analysts voted by BusinessWorld. The central bank delivered a 25-bp hike in its April review.
The decision came as the central bank noted that inflationary pressures remained “firm,” as rising oil and fertilizer prices weighed on other priorities.
“Due to recent developments in the Middle East, inflationary pressures remain strong,” said BSP Governor Eli M. Remolona, Jr. told a press conference at the head of the BSP.fsnow in Manila.
“Global oil and fertilizer prices are still high and continue to put pressure on domestic fuel and food prices. Inflation continues to rise, indicating that inflation is spreading through the effects of the second round,” he added.
In a statement, the BSP said the acceleration of core inflation also poses a threat to inflation expectations.
Core inflation breached the BSP’s 2%-4% target for the first time since December 2023 as it rose to 4.1% from 3.9% last month.
Inflation has been above the central bank’s target of 2%-4% since March, as fuel prices rose amid the Middle East war. However, inflation eased slightly to 6.8% in March from a three-year high of 7.2% in April.
The BSP now sees inflation at 6.4% this year and 4.5% next year, slightly faster than its previous estimates of 6.3% and 4.3%, respectively.
By 2028, the headline rate will return to its tolerance range but still above its target point of 3.1%, the central bank added.
Mr. Remolona said the acceleration in inflation came amid uncertainty over the war in the Middle East and the pending outcome of a peace deal between the US and Iran.
“Even now, since the ceasefire agreement has been signed, we are not sure what will happen,” he said. “Even if the Strait of Hormuz is opened today, if there is an end to the conflict today, we will still need several months to rebuild the infrastructure before we can expect oil prices to return to pre-conflict levels.”
The BSP official also said that these updates do not yet account for the expected impact of El Niño weather.
“We know this one can be unusually large.
Meanwhile, BSP Vice Governor Zeno Ronald R. Abenoja said core inflation will likely remain above target as the second-round price effects of the oil shock may take several months to be fully disseminated.
“We have seen, just as (the governor) said, the direct effect has been felt, but it will still be a few months until we see the results of the direct effect of the property shock,” he said.
“That will be reflected in core inflation in the coming months. So, we may be slightly above the 4% range for the rest of the year,” he added.
According to Mr. Remolona, their decision to not be aggressive in strengthening may give others relief from a struggling economy.
“We hope it will help in some way,” he said. “The concept of stability, I think is important for consumption and investment. Growth has been disappointingly low in the last few quarters, so we think that by being less aggressive, maybe it can help the economy a little bit.”
The central bank also noted that its moderate tightening is expected to support monetary measures aimed at boosting domestic consumption and business sentiment amid weak growth momentum.
‘BABY STEP’ GOES FORWARD
Meanwhile, the central bank has left its door open to continue tightening monetary policy as it wants to reverse inflation 3%-point target.
“There is still climbing possible,” said Mr. Remolona, adding that they have “a lot of room” to strengthen. “I think 25 bps is possible, 50 bps is possible depending on the data we see going forward.”
However, the Monetary Board may continue to tend towards “baby steps” or moving 25 bps at a time, as Mr. Remolona noted that inflation stabilization is “not a big issue” at the moment.
Asked if a quarter increase was on the table at their next meeting on August 27, he said: “I think that’s kind of what we’re doing.follow our previous guidance. ”
However, Mr. Remolona warned of potential market disruptions from excessive corrections.
“We can always have an off-cycle meeting. We can do (a) 50 bps (rate hike) if necessary,” said Mr Remolona. “The problem with big moves is that they tend to disrupt the markets when you reverse them, so it’s better to make a small move in the same direction than to go up a lot and then go down a lot – that disrupts the markets a lot.”
Jun Hao Ng, assistant economist at Oxford Economics, said a third consecutive 25-bp hike could come at the BSP’s policy review in August as he echoed the central bank’s view on expanding the effects of inflation.
“This move extends the tightening cycle that started in April and reflects growing concerns about the results of the second round and rising inflation expectations,” he said in an analysis. “Although the BSP continues to favor a gradual policy adjustment, this appears to indicate a preference for balancing the pace of tightening rather than changing its anti-inflation stance.”
Mr. Ng, however, sees inflation reaching 6% this year, slower than their previous estimate of 6.5%, citing lower fuel prices and the US-Iran peace deal.
“Overall, today’s increase represents a sustained response to upward pressure on prices and (we expect) another 25-bp increase in August,” he said.
Chief Economist at Metropolitan Bank and Trust Co. Nicholas Antonio T. Mapa similarly expects a quarterly increase in the next meeting given the high rate of inflation.
“Still high inflation rates suggest that the BSP is likely to be open to further tightening at the next meeting as (Mr.) Remolona balances expectations of firming inflation and supporting growth momentum,” he said in a Viber message.
For Pantheon Macroeconomics Chief Emerging Asia Economist, Miguel Chanco, the recent increase in the BSP may be the last one considering the strong growth of the country.
“Our bottom line is that today’s rate hike will be the BSP’s last, with the worst part of the inflation shock in the rearview mirror and GDP growth still very subdued; this will likely be confirmed by the Q2 GDP print in August before the next Board meeting,” he said in an emailed note.
The central bank has three regular policy meetings remaining this year in Aug. 27, Oct. 22 and Dec. 17.
