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EXPLAINER: Why Bangko Sentral Hiked Interest Rates to Pre-COVID Level

Surprise move hikes benchmark by 75 points.
by Arianne Merez
2 days ago
Photo/s: Jerome Ascaño

(UPDATE) The Bangko Sentral ng Pilipinas on Thursday raised the benchmark interest rate by 75 basis points, an off-cycle move aimed at taming inflation and defending the peso, analysts said.

This brought the overnight borrowing rate, which banks use to price their loans, to 3.25%. Thursday's move followed back-to-back hikes of 25 basis points in May and June. While not immediate, the benchmark influences how banks price home loans, auto loans and interest on credit cards.


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Raising interest rates will decrease demand for debt and slow spending, thus putting the brakes on inflation that has overshot both government market forecasts.

It will also attract inflows to government bonds, thus propping up the peso, which had weakened to the P55 level to $1. A rate hike also signals to the market that the central bank is moving to keep inflation in check.

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"The monetary board noted favorable conditions arriving from the strong growth rebound so far suggest that the domestic economy can accommodate a further tightening of monetary policy," BSP Governor Felipe Medalla said.

What does the rate hike mean?

The "jumbo" rate hike sends a message that the BSP wants anchoring inflation expectations, said economist Nicholas Mapa. The consumer price index rose 6.1% in June as against the monetary authority's 5% expectation.

It is also unlikely to dim the Philippines' growth prospects as the economy had expanded in the past despite high interest rates, said BPI lead economist Jun Neri.

RCBC chief economist Michael Ricafort said the move would likely temper the peso's weakness.

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Medalla said the policy rate hike was meant to "help manage spillovers from other countries which could potentially disanchor inflationary expectations" after U.S. inflation surged to a fresh peak of 9.1% in June, the fastest since November 1981.

Finance Sec. Benjamin Diokno earlier said prices of goods and other basic commodities are expected to continue increasing as the government estimates inflation to remain "elevated" for the succeeding months.

Inflation quickened to 6.1% in June, faster than market expectations and pushing the full-year average estimate to be at around 5%.


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