The Bangko Sentral increased key policy rates by 50 basis points effective today. This brings the BSP’s overnight borrowing (RRP) and lending (RP) rates to 9.50 percent and 11.75 percent, respectively. The policy rate adjustment is in line with the U.S. Fed Reserve’s decision to raise the federal funds rate by 50 basis points to keep U.S. inflation in check.
The hike in BSP policy rates is expected to keep a lid on domestic inflation. This reflects a forward-looking monetary policy response to the possible future rise in inflation due to demand-side pressures with the projected growth in the economy, and the continued depreciation of the peso that is expected to contribute to inflationary pressures and a build-up in inflationary expectations. Misalignments in the exchange rate, for example, could affect the domestic prices of oil products as well as impact adversely on the external debt service burden of both the public and private sectors. Such a defensive move is thus expected to reduce the variability of inflation and output over time. The rise in policy rates is also expected to stem the outflow of dollars that may result from a narrow differential between domestic and foreign interest rates.
The rise in the BSP’s policy rates is not expected to affect significantly the real sector inasmuch as leading indicators show that the economy has started to turn around. Bank lending rates need not necessarily follow the rise in policy rates given the generally liquid position of our banking system and the relatively low demand for loans. Policy rates will be continuously reviewed and adjusted promptly as the situation may require.
It should be emphasized that the country’s economic fundamentals remain sound and leading economic growth indicators are generally positive. Moreover, the government remains firmly committed to the pursuit of structural reform measures, particularly in the banking, power, and securities sectors. These factors are expected to have a positive impact on investors’ confidence in the long-term growth prospects of the country.