At its meeting on monetary policy today, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 75 basis points to 5.0 percent, effective tomorrow, 18 November 2022. Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 4.5 percent and 5.5 percent, respectively.
The BSP’s latest baseline forecasts indicate a higher inflation path over the policy horizon, with average inflation breaching the upper end of the 2-4 percent target range in both 2022 and 2023 at 5.8 percent and 4.3 percent, respectively. The forecast for 2024 has also risen slightly to 3.1 percent.
In deciding to raise the policy interest rate anew, the Monetary Board noted that core inflation has risen sharply in October, indicating stronger pass- through of elevated food and energy prices as well as demand-side impulses on inflation.
At the same time, the risks to the inflation outlook lean strongly toward the upside until 2023 while remaining broadly balanced in 2024. Upside risks are associated with elevated international food prices owing to higher fertilizer costs, trade restrictions, and adverse weather conditions. On the domestic front, the impact of weather disturbances on the prices of fruits and vegetables, supply disruptions in key food commodities such as sugar and meat, as well as pending petitions for transport fare hikes could also exert upward pressures on inflation. Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the main downside risk to the outlook.
Given the increased likelihood of further second-round effects, persistent inflationary pressures, and the predominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy action to safeguard price stability. With the strong growth of the economy in the third quarter of 2022, domestic demand is seen to hold firm owing to improved employment outturns, investment activity, and consumer spending. On the other hand, a sizeable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations.
The Monetary Board is also reassured by the timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices, including those aimed at alleviating supply shortages and strengthening farm productivity.
Looking ahead, the BSP will continue to take all necessary action to bring inflation back within the target band over the medium term, in keeping with its primary mandate to sustain price and financial stability. ##