The policy-making Monetary Board raised its rate by another 50 basis points as the Bangko Sentral ng Pilipinas steps up the battle against rising prices.

The policy move brings the overnight reverse repurchase agreement rate to 5.5 percent.

Accordingly, the interest rates on the overnight deposit and lending facilities will be set between five percent and six percent, respectively.

BSP Governor Felipe Medalla had previously indicated he would prefer to maintain a 100 bps differential over the US Federal Reserve funds rate.

ING Philippines senior economist Nicholas Mapa said the less-pronounced pressure on the peso of late allowed the BSP some space to downshift the pace of rate hikes.

"However, given elevated core and headline inflation, not to mention BSP's own admission that inflation risks are tilted to the upside, a sizable rate increase was warranted," Mapa added.

The BSP's latest baseline inflation forecasts remain above the upper end of the two percent target range for 2022 and 2023 at 5.8 percent and 4.5 percent, respectively.

However, the forecast for 2024 fell to 2.8 percent owing mainly to the further easing in oil prices, a stronger peso and the slightly lower domestic growth outlook resulting in part from the BSP's cumulative policy rate adjustments.

Pent-up demand causes uptick
The MB cited the further uptick in headline and the sharp rise in core inflation in November amid pent-up demand.

Moreover, upside risks continue to dominate the inflation outlook up to 2023 while remaining broadly balanced in 2024.

The expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints.

On the domestic front, trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards, according to Medalla.

Meanwhile, the impact of a weaker-than -expected global economic recovery continues to be the primary downside risk to the outlook.

Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the MB deemed it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible.

At the same time, an adjustment in the policy interest rate will continue to provide a cushion against external spillovers amid tighter global financial conditions.

The BSP said it remains steadfast in its commitment to its primary mandate of sustaining price and financial stability and stands ready to take all necessary action to bring inflation to within the 2-4 percent government target band over the medium term.