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The Bangko Sentral ng Pilipinas (BSP) has vowed to continue hiking its key policy rates “as necessary” to help prevent a further increase in the second-round effects of the elevated inflation rate, according to a report by Philippine News Agency.

In an Open Letter to President Ferdinand R. Marcos Jr., dated Jan. 24, 2023, BSP Officer-in-Charge Francisco Dakila Jr. said the hikes also aim “to prevent inflation expectations from becoming disanchored.”

“Our approach to monetary action will remain data-dependent and contingent on the inflation outlook, along with other available macroeconomic information at a given point in time,” he said.


The Open Letter, posted on the BSP website on Friday, was issued to explain the factors behind the breach in the government’s inflation target band, which is 2 percent to 4 percent for 2022 until 2024.

The rate of price increases averaged 5.6 percent last year, with the December level of 8.1 percent the highest since November 2008.

The monthly inflation rate breached the government’s target band in April last year when it accelerated to 4.9 percent on an annual basis from the previous month’s 4 percent.

The BSP said the domestic inflation rate commenced its uptrend in March last year “as domestic fuel pump prices increased, reflecting the uptrend in international crude oil prices.”

The jumps in the global prices of oil were traced to concerns about tighter supply conditions vis-à-vis the impact of geopolitical issues in Eastern Europe and the decision by oil-producing countries to lower production targets.

The BSP explained that as the rate of price increases began to rise, central banks around the globe started to increase their respective key rates.

This, along with domestic supply constraints on several food items such as sugar, fish, and vegetables and the supply shocks in the global market because of the higher energy prices, which resulted in upticks in the prices of fertilizer and farming costs, increased inflation concerns, the BSP said.

Volatility in the financial market also persisted because of this and, in turn, weakened the peso and led to higher importation costs.

Pent-up demand also contributed to price pressures last year and resulted, not just in the uptick of the headline inflation but also in the core inflation, which excludes the volatile oil and food items.

Eventually, the second-round effects of higher inflation materialized as seen in the hikes in transport fares and the minimum wage.

Thus, the BSP began to hike its key rates in May last year after noting that the recovery of the economy is seen to cushion the impact of the rate hikes.

The central bank’s policy-making Monetary Board (MB) increased the BSP’s key policy rates by a total of 350 basis points last year to 5.5 percent for the overnight reverse repurchase (RRP) facility.

This is a turn-around from the rate cuts in 2020, which brought the RRP to a record-low of 2 percent, which was made to encourage lending activities and boost economic activities to counter the impact of the pandemic on the domestic economy.

Amid these developments, the central bank said its latest forecast indicates that inflation likely peaked last December and will decelerate this year as prices of oil and non-oil commodities ease in the international market.

It said the base effects of the key rate hikes and the transport fare are also expected to contribute to the deceleration of the inflation rate this year.

“Inflation is expected to revert to the 2-4 percent target range by the second half of 2023,” it said.

The BSP, however, noted that the “balance of risks surrounding the inflation outlook are strongly skewed towards the upside in 2023 but remain broadly balanced for 2024.”

“The upside risks to the inflation outlook over the policy horizon mainly stem from trade restrictions, increased prices of fruits and vegetables owing to possible domestic weather disturbances, higher sugar prices, as well as pending petitions for transport fare hikes and potential wage adjustments in 2023,” it said. "These factors are, however, seen to be countered by the effects of weaker-than-expected global recovery.”

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