The Bangko Sentral ng Pilipinas on Thursday raised its policy rate on an off-cycle period to 6.5 percent from 6.25 percent to manage a likely inflation uptrend this year until July next year.

The BSP has, thus far, raised its policy rate by 450 basis points after inflation peaked at 8.7 percent in January and re-accelerated again to 6.1 percent last month from 5.3 percent in August.

The BSP move will increase borrowing costs, with new interest rates on the overnight deposit at 6 percent and lending facilities at 7 percent.

BSP Governor Eli Remolona Jr. said the country's inflation rate might settle at 4.7 percent next year, higher than the central bank's previous target range of 2 percent to 4 percent for this year and 4.3 percent in the next.

He added inflation might quicken further above 4.7 percent from July to March next year.

"The balance of risks to the inflation outlook still leans significantly toward the upside, due mainly to the potential impact of higher transport charges, electricity rates, international oil prices, and minimum wage adjustments in areas outside the National Capital Region," he explained.

Limit spending

With the higher interest rates, Remolona said consumers will likely limit their spending which will discourage businesses from raising prices.

"The BSP's Monetary Board recognized the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations," the BSP chief said.

Remolona added the slow global economic recovery and effects of the weather disturbances from El Niño on food supply might also restrain consumption toward a moderated inflation.

"Meanwhile, the effect of a weaker-than-expected global recovery as well as government measures to mitigate the effects of El Niño weather conditions could temper inflationary impulses," he said.

The BSP Monetary Board will again announce to the public on 16 November whether to change its policy rate in compliance with its normal cycle period happening every six weeks.

However, Remolona already cautioned the public of likely controlled consumer spending in the medium term as the BSP expects to maintain high interest rates in the near future.

Tighter settings

"Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident," he said.

"We will consider another rate hike if things are worse than we thought," Remolona continued. 

The BSP has raised its policy rate by 425 basis points after inflation peaked at 8.7 percent in January and re-accelerated again to 6.1 percent last month from 5.3 percent in August.

The Philippine Statistics Authority attributed this to persisting higher food and fuel prices partly driven by global food trade restrictions and oil trade disruptions from the Russia-Ukraine war.

Falls a little behind

"In my view, I think we fell a little behind that's the reason for this effort to catch up. We didn't look closely enough at expectations," Remolona said as he reflected on the BSP's unchanged rate at its September 21 meeting.

"One of them that was very striking was our consumer expectations survey which said about 92 percent think that in the next 12 months inflation will be above 4 percent, similar to expectations by firms," the BSP chief continued.