BSP hikes rates anew
Inflation still a concern but forecasts for 2018, 2019 lowered
MONETARY authorities on Wednesday raised key interest rates for the second time this year, noting the need for “follow-through” action to address inflation.
The Bangko Sentral ng Pilipinas’ (BSP) policy-setting Monetary Board ordered a 25-basis point (bps) adjustment, which brought the central bank’s overnight borrowing, lending and deposit rates to 3.5 percent, 4.0 percent and 3.0 percent, respectively.
The Monetary Board , however, trimmed its inflation forecasts for 2018 and 2019 to 4.5 percent and 3.3 percent, respectively, from 4.6 percent and 3.4 percent previously.
The rate hike followed an identical 25-bps increase last May 20 – the first in over three years and prompted by inflation having breached the BSP’s 2.0-4.0 target.
“In deciding to raise the BSP’s policy interest rate anew, the Monetary Board noted that inflation expectations remained elevated for 2018 and that the risk of possible second-round effects from ongoing price pressures argued for follow-through monetary policy action,” central bank Governor Nestor Espenilla Jr. said.
While the rise in consumer prices is expected to return to the 2.0-4.0 percent range in 2019, Espenilla stressed that “elevated expectations for 2018 highlight the risk posed by sustained price pressures on future wage and price outcomes.”
“Equally important, while latest baseline forecasts have shifted lower for 2018-2019, upside risks continue to dominate the inflation outlook, even as various measures of core inflation continue to rise,” he added.
The impact of international oil and commodity price movements, the BSP chief noted, is expected to be stronger given prevailing demand conditions.
The latest rate hike, Espenilla said, “enables the BSP to reinforce its signal on safeguarding macroeconomic stability in an environment of rising commodity prices and ongoing normalization of monetary policy in advanced economies.”
“The BSP is prepared to take further policy action as needed to achieve its price and financial stability objectives,” he added.
“The action taken today, in our view, is sufficient at this time.”
He also pointed out that the BSP was not matching monetary policy actions by other central banks like the United States Federal Reserve’s latest interest rate hike.
“We are always certain that our monetary policy is always determined by our domestic needs,” the BSP governor said.
Central bank Deputy Governor Diwa Guinigundo, meanwhile, said the Monetary Board considered May’s lower-than-expected 4.6 percent inflation in deciding to revise its forecasts.
Expectations of sustained economic activity within the year, rising global oil prices, higher minimum wages and the increased excise taxes for tobacco were also discussed.
Asked if inflation had already peaked in May, Guingundo replied that the BSP expects this “to happen in the third quarter of the year” even as the month-on-month trend appears to be slowing.
Commenting on the rate hike, an analyst from London-based research consultancy firm Capital Economics said it could mark the end of a short tightening cycle.
“The main reason why we suspect the central bank will not rush to hike rates again is that inflation is close to peaking,” Capital Economics Asia economist Alex Holmes said.
He explained that while inflation could creep up over the next couple of months on the back of higher oil prices and another increase in tobacco duties, it should begin to fall by the end of third quarter.
“For one, food price inflation is set to continue falling, especially if, as seems likely, Congress passes a bill to lift quotas on rice imports. Pressure from higher oil prices should fade later this year,” Homes added.
Lastly, he noted that January’s indirect tax hikes, which have pushed up the prices of fuel, high-sugar drinks and tobacco, would drop out of the annual comparison at the start of 2019.
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