BSP Keeps Rates Unchanged at 6.25 Percent for the 3rd Time
August 22, 2023
On Thursday, August 18, 2023, the Bangko Sentral ng Pilipinas (BSP) kept its benchmark overnight repurchase rate unchanged at 6.25 percent to establish a balance between supporting economic growth and ensuring inflation does not spike. BSP Governor Eli Remolona said, “given these considerations, the Monetary Board deemed it appropriate to maintain monetary policy settings to allow a moderation of inflation even as authorities continue to assess the emerging risks to the inflation outlook.”
Department of Finance (DOF) Secretary Benjamin Diokno expressed that he does not see the need for the bank to raise rates to match that of the US Federal Reserve, which previously raised borrowing costs by 25 bps. He also sees inflation lowering to 2 percent in the 1st quarter of 2024. On another note, the BSP recently raised its inflation forecast to 5.6 percent for 2023 and 2.8 percent for 2024, from 5.5 percent and 3.3 percent, respectively. Last month, inflation stood at 4.7 percent, the lowest recorded this year since January’s 8.7 percent rate.
The slower-than-expected gross domestic product (GDP) growth for the 2nd quarter of 2023 at 4.3 percent, caused by the contraction in government spending and high-interest rates, were other factors considered in pausing hikes. This dragged the 2023 average GDP to 5.3 percent. Economic managers of the Marcos Jr. administration said the GDP must reach at least 6.6 percent in the second half of the year to achieve the target percentage range of 6 to 7 percent.
To curb inflation, the central bank raised its borrowing costs by 425 bps from May 2022 to March 2023 which has brought its key policy rate to a 16-year high. As inflation continued to ease in April, this allowed the BSP to pause rate hikes. Despite this, BSP Deputy Governor of the Monetary and Economics Sector Francisco G. Dakila, Jr. said the monetary tightening has not had any significant impact on economic growth. “We are estimating that the growth impact has so far been minimal. For every 25-bp increase in the policy rate, the reduction in growth would be at just around 1 basis point for 2023. Part of the reason why the impact is minimal is because what really matters is the real interest rate — the interest rate minus the inflation rate. Inflation is still elevated, so in real terms the rate of interest is still quite manageable,” he said.
Meanwhile, BSP Governor Remolona said “we’re ready to tighten if we need to tighten. We’re following the data,” when asked if the Board is prepared to continue raising hikes.
The Monetary Board will hold its next meetings on September 21, November 16, and December 14.
