The Bangko Sentral ng Pilipinas’ (BSP) recent decision to hike interest rates may help curb rising inflation, according to Michael Ricafort, chief economist of Rizal Commercial Banking Corporation (RCBC).

In a Wednesday, 29 April episode of the DAILY TRIBUNE program Straight Talk, Ricafort drew parallels between the current energy shock and the Russia-Ukraine war in 2022, which also drove global oil prices higher, though not as sharply as today.

“Four years ago, during the Russia-Ukraine war, central banks around the world — led by the Fed, the US central bank — raised rates because that deliberately slowed down the global economy,” he said.

Engineered slowdown

“That’s an engineered slowdown of the global economy by raising interest rates and borrowing costs to curb investment and consumption, and eventually reduce oil demand and bring down prices,” Ricafort added.

The BSP — whose primary mandate is price stability — raised its policy rate by 25 basis points last Thursday in response to inflationary pressures stemming from the Middle East conflict, making it among the first in the region to tighten policy amid the crisis.

The central bank had earlier opted to hold rates to support economic recovery following last year’s graft scandal, which weighed on growth.

Mirroring 2022

Today’s situation mirrors the backdrop in 2022, when the global economy was still recovering from the Covid-19 pandemic as the Russia-Ukraine war broke out.

As one of the world’s largest oil exporters, Russia’s involvement triggered sanctions and fears of supply disruptions, sending oil prices sharply higher — similar to current trends.

“[When] the Russia-Ukraine war started, NYMEX oil was $92. It rose to as high as $130 within two weeks,” Ricafort said. “But it took about six months from peak to trough — from $130 back to around $70 or slightly below,” he added.

BSP’s tightening cycle

The BSP began its tightening cycle in May 2022 with a 25-basis-point hike in response to rising inflation. Full-year inflation eventually accelerated from 5.1 percent to 8.1 percent. The BSP implemented a total of six rate hikes that year, amounting to 350 basis points, bringing the policy rate from 2.0 percent to 5.5 percent by end-2022.

Governor Eli M. Remolona Jr. has said that monetary policy typically takes around 12 months to fully transmit through the economy.

Inflation began to ease in May 2023 — roughly a year after the initial rate hike. By end-2023, headline inflation had slowed to 3.9 percent, down 4.2 percentage points year-on-year.

“The bottom line is to help stabilize inflation. They were successful four years ago,” Ricafort said.