At its meeting on monetary policy Thursday, the Monetary Board decided to raise the interest rate on the Bangko Sentral ng Pilipinas’ (BSP) overnight reverse repurchase facility by 25 basis points to 6.25 percent, effective March 24, 2023.
Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 5.75 percent and 6.75 percent, respectively.
The Monetary Board’s decision was based on the sum of new information and its assessment of the effects of past policy actions, which warranted a continuation of monetary tightening to anchor inflation expectations.
With core inflation rising in February despite a modest decline in headline inflation, further monetary policy action was deemed necessary to address broadening price impulses emanating from robust domestic demand and lingering supply-side constraints.
The latest baseline projections point to an elevated path over the near term. Average inflation is projected to settle above the upper end of the 2-4 percent target range at 6.0 percent in 2023 before returning to the target at 2.9 percent in 2024.
The inflation forecasts reflect the cumulative impact of the BSP’s policy rate adjustments and the slower growth outlook on both the domestic and external fronts.
Moreover, inflation expectations have increased slightly for 2023, while those for 2024 and 2025 remain near the upper end of the target band.
The Monetary Board supports the creation of the Inter-agency Committee on Inflation and Market Outlook.
The balance of risks to the inflation outlook for 2023 and 2024 also continue to tilt heavily towards the upside.
The effect of supply shortages on domestic food prices remains a concern, while the potential impact of higher transport fares, increasing electricity rates, as well as above-average wage adjustments in 2023 point to the broader-based nature of price pressures.
On the downside, the impact of a weaker-than-expected global economic recovery continues to be the primary factor that could dampen inflation.
Given these considerations, the Board decided that follow-through monetary action would help ease persistent price pressures from here and abroad as well as further realign inflation expectations with the target band over the policy horizon. Further policy tightening will also preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in advanced economies.
Nevertheless, even as the BSP has assessed that the Philippine banking system is resilient to evolving market conditions, the BSP continues to keep a watchful eye over developments in the international banking industry.
Moving forward, the BSP reassures the public that monetary authorities remain ready to respond further to inflation risks in line with the BSP’s data-dependent approach to ensuring price and financial stability.