MANILA, Philippines – The Bangko Sentral ng Pilipinas on Thursday, June 23, hiked key interest rates by 25 basis points, despite soaring inflation and a weakened peso.

The BSP’s overnight reverse repurchase facility still stands low at 2.5%, effective Friday, June 24. Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 2% and 3%, respectively.

The peso has dipped to the P54-level against the US dollar, the weakest in over 16 years, while inflation hit 5.4% in May.

“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,” said BSP Governor Benjamin Diokno.

Inflation is unlikely to settle within government’s assumption of 3.7% to 4.7%. The BSP sees inflation settling between 4.6% to 5% in 2022.

BSP Deputy Governor Francisco Dakila said that inflation will average at 5.6% in second half of 2022 and will likely remain above target range until the first half of 2023.

Increasing interest rates increases the cost of borrowing money and attempts to lower inflation. In turn, consumers spend less and reduces demand for goods and services.

Analysts, however, noted that the latest increase may not be enough to anchor inflation expectations.

Incoming central bank governor Felipe Medalla earlier hinted that monetary tightening would be gradual.

“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 BSP said. – Rappler.com