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The Bangko Sentral ng Pilipinas (BSP) tightened its monetary policy for the second time this year amid expectations that inflation targets for 2022 and 2023 would be breached.

In its monetary policy meeting on Thursday, the BSP hiked the interest rate on its overnight reverse repurchase facility by 25 basis points to 2.5 percent.

Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 2 percent and 3 percent, respectively.

BSP Governor Benjamin E. Diokno said the Monetary Board mainly considered the rising inflationary pressures in tightening their monetary policy stance during the meeting.

In particular, the BSP now expects inflation to average at 5 percent for this year, revised from its earlier forecast of 4.6 percent in May. The country’s inflation target for this year and next year is at 2 to 4 percent.

For this meeting, the BSP also announced that inflation will breach the target for 2023, and is expected to average at 4.3 percent. This is an upward adjustment to their within-target forecast of 3.9 percent in May.

However, average inflation is also seen to subsequently decline to 3.3 percent in 2024.

“In deciding to raise the policy interest rate anew, the Monetary Board noted that upside risks continue to dominate the inflation outlook up to 2023, with pressures emanating from the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, as well as pending petitions for transport fare hikes due to elevated oil prices,” Diokno said.

“Meanwhile, the impact of a weaker-than-expected global recovery and the possible reimposition of local Covid-19 restrictions amid an uptick in infections continue to be the main downside risks to the outlook,” he added.

Deputy BSP Governor Francisco Dakila Jr. said the BSP has raised its oil price forecasts for the year, which largely affects inflation for 2022 and 2023.

Dakila said the BSP’s latest forecast on crude oil prices is that it will settle at $106.30 per barrel, up from its $104.04 per barrel forecast in May. For next year, crude oil is expected to hit $95.30 per barrel, from the $89.50 per barrel forecast in May.

The deputy governor said a Dubai crude oil price of $90 per barrel in 2023 is the threshold at which the Philippines can expect that inflation will decelerate to within the target band for that year.

“Given these considerations, the Monetary Board believes that a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” the governor said.

Diokno also reiterated the BSP’s call and support for “carefully coordinated efforts” of other government agencies as part of a whole-of-government approach in implementing non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation. 

While the BSP said their “general direction” is further normalization of monetary policy rates in its coming meeting, BSP officials did not say whether they will stick to the initial plan of a “gradual tightening” or shift to more aggressive hikes as price growth continues to hasten. Dakila said they will continue to monitor data for their next moves.