Monetary Board flags more rate hikes in Dec. meeting minutes

THE MONETARY Board signaled its readiness to continue raising benchmark interest rates if inflation persists, putting it at odds with other central banks which have indicated their intention to slow the pace of monetary tightening, according to the minutes of the board’s December meeting. 

When the board met last month to weigh another rate increase, officials were already thinking of further tightening as an inflation deterrent, according to the minutes. 

The Bangko Sentral ng Pilipinas (BSP) raised borrowing costs by 50 basis points (bps) during its Dec. 15 meeting, adding to the 350 bps worth of rate hikes in 2022 and bringing the key rate to a 14-year high of 5.5%.  

“Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the Monetary Board deemed it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible,” the board said. 

“Continued monetary tightening will also provide a cushion against external spillovers even as major central banks have signaled a possible slowing down of monetary policy tightening,” it added.  

Policymakers have noted that inflation remains high and broad-based as reflected in the increase in core inflation in November. 

The consumer price index (CPI) rose to 8% in November from 7.7% in October. Core inflation, which excludes food and fuel prices, which are deemed volatile, rose 6.5% in November. 

Inflation expectations also rose further as the central bank’s survey of private-sector economists for December turned up higher consensus inflation forecasts for 2023 of 5.1%, from 4.9% previously. 

“The expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints,” the BSP said.  

“On the domestic front, trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare increases, as well as potential wage adjustments in 2023 could push inflation upwards,” it added.  

According to the central bank, La Niña conditions will also likely persist through February before easing through April. 

La Niña brings with it the risk of more tropical cyclones, resulting in sustained flooding, the central bank said. 

The BSP expects full-year inflation to come in at 4.5% in 2023 before easing to 2.8% by 2024. Inflation averaged 5.8% in 2022, peaking at 8.1% in December.  

Meanwhile, the board noted that “the peso depreciation against the US dollar slowed down to 9.8% year-to-date as of 29 November 2022, from 12% in October. The peso appreciated on positive market sentiment in November amid lower-than-expected US inflation in October, which fueled optimism that the US Federal Reserve could slow its pace of rate increases, and the decline in global oil prices,” the BSP said.  

The Fed delivered 425 bps worth of rate hikes in 2022, which brought its policy rate to 4.25-4.5%.

“The Philippine Stock Exchange Index (PSEi) averaged 6,388.9 index points in November, higher by 6.6% than its October average. The recovery in the benchmark index could be attributed to improved market sentiment following positive developments in the domestic economy,” the board added.  

The positive developments include faster-than-expected third quarter growth, positive third-quarter corporate earnings reports, and S&P Global Ratings’ affirmation of the Philippines’ investment-grade credit rating of BBB+ with a stable outlook.  

“Against this backdrop, there was market optimism on the economy’s ability to absorb the 75-bp rate increase by the BSP at its November policy meeting. Market expectations of a slower pace of monetary policy tightening by the US Federal Reserve also contributed to renewed investor confidence,” the Monetary Board said.  

Gross domestic product (GDP) is also expected to meet government growth targets in 2022 and 2023, but could miss the official 6.5-8% target for 2024.  

“The slower growth is mainly due to the lower global GDP growth assumption for 2023 and the impact of the policy rate adjustments of the BSP,” the board said.  

GDP expanded by 7.6% in the third quarter, bringing the nine-month average to 7.7%. The government expects GDP to have grown by 6.5-7.5% in 2022, and targets 6-7% growth in 2023.    

The Philippine Statistics Authority is scheduled to release fourth-quarter 2022 GDP data on Jan. 26. 

The Monetary Board is scheduled to meet on Feb. 16 for its first policy meeting this year. — Keisha B. Ta-asan