The Philippine central bank increased its benchmark interest rate for the first time in three-and-a-half years on Thursday, with an aim to curtail elevated inflation as domestic economic conditions started to rebound in the first quarter.
The Monetary Board decided to raise its benchmark overnight reverse repurchase facility rate by 25 basis points to 2.25 percent, the Bangko Sentral Ng Pilipinas said.
The latest hike was the first since November 2018. The previous change in the rate was a quarter-point reduction in November 2020 amid a resurgence in the coronavirus pandemic.
Interest rates on the overnight deposit and lending facilities were also raised by 25 basis points to 1.75 percent and 2.75 percent, respectively.
The strong rebound in domestic economic activity and labor market conditions during the first quarter of this year provided scope to continue rolling back its pandemic-induced interventions, consistent with its exit strategy from monetary accommodation, the board said.
Baseline forecasts have further shifted higher since the previous monetary policy meeting in March, indicating that elevated inflation pressures could persist over the policy horizon, the board observed.
“Average inflation is likely to breach the upper end of the 2-4 percent target range in 2022 at 4.6 percent, while the forecast for 2023 has edged closer to the upper end of the target band at 3.9 percent,” the bank said.
Policymakers noted that the balance of risk to the inflation outlook was mainly impacted by higher oil prices, including transport fares and the on-going shortage in domestic pork and fish supply.
Apart from this, the higher-than-expected adjustment in minimum wages in some regions will push up inflation in the near term.
The bank also observed that the downside risks for the economy were linked mainly to the potential impact of a weaker-than-expected global economic recovery amid the prevailing threat of pandemic infections, geopolitical tensions, and a tightening of global financial conditions.
The bank expects a timely increase in the interest rate to help arrest further second-round effects and temper the build-up in inflation expectations.
“Looking ahead, the pace and timing of further monetary policy actions by the BSP shall be guided by data outcomes, in keeping with the BSP’s price and financial stability objectives,” the bank said in a statement.