MANILA (UPDATE) - The Bangko Sentral ng Pilipinas raised its benchmark rate by 50 basis points to slow down inflation.

So far, the BSP has hiked its overnight reverse repurchase rate or policy rate by 175 basis points to 3.75 percent.

The policy rate is used by banks to price loans for consumers and businesses.

Previously, the BSP kept its benchmark rate at a historic low of just 2 percent, to prop up the economy amid the ravages of the COVID-19 pandemic.

After inflation further quickened to 6.4 percent in July as prices of food, fuel and transport continued to rise, BSP Governor Felipe Medalla said the central bank has also raised its inflation forecast for the year.

“The BSP’s latest baseline forecasts have shifted higher for 2022, with average inflation projected to breach the upper end of the 2-4 percent target range at 5.4 percent,” Medalla said.

The BSP meanwhile lowered its inflation forecast for 2023 to 4 percent from 4.2 percent, and for 2023 to 3.2 percent from 3.3 percent.

However, Medalla also noted that “the inflation target remains at risk over the policy horizon owing to broadening price pressures.”

“Elevated inflation expectations likewise highlight the risk of further second-round effects.”

The BSP chief said inflation may still quicken up to 2023 due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases.

Factors that may slow inflation meanwhile are a weaker-than-expected global economic recovery as well as the resurgence of local COVID-19 infections.

Medalla also said they expect inflation will only peak by the 10th or 11th month of this year.

This was in contrast to Finance Secretary Benjamin Diokno’s earlier statement that inflation may have already peaked in July at 6.4 percent.

Medalla said further rate hikes were possible but the economic recovery was strong enough to withstand further tightening of monetary policy.

“It is impossible for tightening not to reduce economic growth. However, it is still possible that even with possibly additional measures, respectable growth is still possible. I think I will leave it at that. I wish I could tell you this is the last increase,” Medalla said.

Government economic managers expect GDP to grow between 6.5 to 7.5 percent this year. While GDP grew 7.4 percent in the second quarter from 8.2 percent in the first, on a quarter-on-quarter basis, GDP growth fell -0.1 percent, according to the state statistics bureau.

Medalla however said the BSP’s main focus was price stability.

"Whether respectable growth is lower or within the DBCC target of 6.5 to 7.5 percent is, of course, important to us, but at the same time, to us, price stability is the primary concern."

Medalla said the hikes are necessary now if the Philippines wants to avoid larger, more painful rate hikes in the future.

"We are not really hard-hearted economists here. We are soft-hearted but we have hard heads. If you take a long run view, there is no conflict between the central bank maintaining the confidence that the economy will have price stability.”

The BSP's recent interest rate hikes have also kept the Philippine peso from further weakening versus the US dollar, which has surged this year amid aggressive rate hikes by the US Federal Reserve.

- With a report from Warren de Guzman, ABS-CBN News

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