Bangko Sentral ng Pilipinas

Bangko Sentral holds interest rates at 6.5% for third straight time

Lance Spencer Yu

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Bangko Sentral holds interest rates at 6.5% for third straight time

BSP. The Bangko Sentral ng Pilipinas headquarters in Quezon City on May 31, 2023.

Jire Carreon/Rappler

The Monetary Board sees some risks to the inflation outlook receding, but it nevertheless maintains a 'more prudent monetary policy stance' by keeping rates high

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) maintained its key policy rate at 6.5%, the third time that the central bank has kept rates steady since an off-cycle hike in October 2023.

In its first rate-setting meeting of 2024 on Thursday, February 15, the BSP’s Monetary Board announced that its benchmark interest rate will stay at 6.5%, a 16-year high.

Raising or lowering the key policy rate, which in turn affects the interest rates that banks charge consumers and businesses, is the BSP’s way of controlling inflation. Theoretically, increasing interest rates or maintaining them at an elevated level can discourage people from borrowing and spending, slowing down economic growth and the rise of prices.

The effect of key policy rate decisions on inflation and the economy can take months to show. Changes in interest rates take time to work their way through the banking system, consumers, and businesses.

In relation to this, the BSP said “recent indicators also suggest that economic activity could moderate in the near term as the full impact of the BSP’s prior monetary policy tightening continues to manifest.”

Nevertheless, the central bank expects domestic economic activity to “remain intact over the medium term.”

The BSP’s counterpart in the United States – the Federal Reserve – has signaled that it intends to keep interest rates “higher for longer” in a bid to keep inflation under control.

“Our view then is that any expectation of an early rate cut is optimistic. It is more likely that the Fed will keep its policy rates elevated over a longer period than expected by the market. Progress has been made, and by extension, the spillover pressures are not as pronounced. But the task of calibrating the economy with policy rates is also not yet complete. This is why most central banks do not take off the table the possibility of yet another rate hike,” the BSP wrote in its recently released 2023 Financial Stability Report.

BSP Governor Eli Remolona Jr. has also previously said that the Monetary Board will only consider cutting rates once inflation settles within the government’s target range of 2% to 4%.

“We want to be sure we stay comfortably within the target range. And then when we’re comfortable about that, then we can start to think about easing,” Remolona said on December 6, 2023.

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What Bangko Sentral’s interest rate hike means for consumers and the economy

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Inflation has already begun to cool as it went down for the fourth straight month in January, falling to 2.8%. It was the second consecutive month that inflation fell within the government’s target range.

Looking ahead, the BSP’s latest baseline and risk-adjusted inflation forecasts also show the inflation rate settling within the government’s 2% to 4% target range. The latest baseline inflation projection is 3.6% for 2024 and 3.2% for 2025, while the risk-adjusted inflation forecast is 3.9% for 2024 and 3.5% for 2025.

RISKS. This shows the risks to the inflation outlook that the Bangko Sentral ng Pilipinas is monitoring. Screenshot from BSP livestream

While risks to the inflation outlook have eased, they remain tilted toward the upside. In particular, the BSP mentioned that the government is taking a “step in the right direction” to control rice prices by entering into a five-year supply agreement with Vietnam and by directing efforts toward boosting the rice sector’s productivity.

BSP Monetary and Economic Sector head Iluminada Sicat affirmed that although there seems to be “some improvements” in inflation, the central bank doesn’t see rate hikes coming just yet.

“We still consider taking a more prudent monetary policy stance at this moment,” Sicat said during Thursday’s press conference. –

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Lance Spencer Yu

Lance Spencer Yu is a multimedia reporter who covers the transportation, tourism, infrastructure, finance, agriculture, and corporate sectors, as well as macroeconomic issues.