The Bangko Sentral ng Pilipinas (BSP) [link] announced a 50 basis point (bp) raise in interest rates yesterday, effective February 17.
The announcement came after the close of trading, which was basically sideways in anticipation of the BSP’s decision.
The 50 bp raise is higher than the 25 bp raise that the BSP thought was appropriate when it was speaking about this decision back in January.
The BSP said that the surprise inflation increase in January, coupled with the country’s unusually strong GDP growth in Q4/22, meant that there is a “further broadening of price pressures”, “underscoring the need to preempt the emergence of further second-round effects.”
The BSP said that the risks of inflation are to the upside, that is, that there is a greater chance that inflation will be higher than projected rather than lower.
The BSP reiterated its call for a “timely and more aggressive whole-of-government approach” to the persistent problem of food costs, including measures meant to boost domestic productivity in the agricultural sector.
The BSP increased its projected average inflation for 2023 to 6.1%, which, in November, the BSP projected would only be 4.3%, but held steady on its projected inflation for 2024 at 3.1%.
MB BOTTOM-LINE
The BSP is practically begging the government to do more to protect the average Filipino from continued price shocks on the essentials for day-to-day living, particularly in the area of food costs and food security.
What the government should do and how it should do it are beyond the scope of this newsletter, but the between-the-lines panic of the BSP’s actions and this statement are not.
On the one hand, I’m glad to see the BSP is unafraid to take in that terrible January surprise and ditch plans that it had made publicly. The 50 bp raise actually outpaced the US Federal Reserve, and so it should do a lot to protect the peso’s valuation relative to the US Dollar.
On the other hand, I don’t like how the BSP seems to be always caught flat-footed by the basic CPI numbers, and I really don’t like how this talk of “second round effects” still seems to frame those effects as largely hypothetical.
They’re not. We’re already seeing the high inflation for basic commodities like gas, food, and electricity bleeding into the costs of nearly everything. A good example: haircuts.
The price of a haircut is just one example out of literally hundreds that you could think of where the price of a good or service has gone up when normally you wouldn’t expect that price to have been sensitive to elevated gas, food, or electricity prices.
When inflation is high enough for long enough, businesses make price adjustments to maintain profit margins instead of just eating the losses while waiting out the storm. It’s been a year-long storm already, and 2023 is projected to be worse than 2022.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.