Philippines: Inflation urged the BSP to hike rates by 75 bps – UOB

UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting comment on the recent decision by the BSP to unexpectedly hike rates by 75 bps.

Key Takeaways

“In a regular but not scheduled monetary policy setting meeting this morning (14 Jul), Bangko Sentral ng Pilipinas (BSP) raised its overnight reverse repurchase (RRP) rate by 75bps to 3.25%. Likewise, both the overnight deposit and lending rates were also raised to 2.75% and 3.75% respectively. It was a rare move with the biggest rate hike since Oct 2000, and followed two back-to-back rate increases of 25bps each in May and Jun.”

“BSP saw an urgent need to get ahead of the inflationary threat and stressed that this urgent policy action is intended to help manage spillovers from other countries that could potentially disanchor inflation expectations. It also believes that favourable domestic economic conditions so far this year can accommodate a further tightening of monetary policy.”

“We believe that the latest large off-cycle rate hike will not mark the end of the BSP’s monetary policy normalisation as yet. In fact, we see the central bank hinting for more interest rate rises ahead, depending on the incoming domestic inflation and GDP data as well as global and regional central banks’ rate decision in the near term. Given that BSP has escalated its rate hike pace faster than we had anticipated for 2H22, we now bring forward our BSP rate hike projections for 1H23 to this year, taking the RRP rate back to the pre-pandemic level of 4.00% by the end of 2022.”