Monetary Board orders another 50-bps rate hike
Inflation now expected to continue breaching 2.0-4.0% target next year
MONETARY authorities raised key interest rates for a fourth time this year on Thursday, prompted by elevated inflation risks following August’s fresh nine-year high.
The 50-basis point (bps) adjustment brought the Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing, lending and deposit rates to 4.50 percent, 5 percent and 4 percent, respectively.
The BSP’s policymaking Monetary Board also raised its inflation forecasts for 2018 and 2019 to 5.2 percent and 4.3 percent, respectively, from 4.9 percent and 3.7 percent previously, but retained the 3.2 percent projection for 2020.
“The Monetary Board recognized that a further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures,” central bank Deputy Governor Chuchi Fonacier said in a press briefing.
Consumer price growth accelerated to 6.4 percent last month, well above the BSP’s 2.0-4.0 percent target for the year. Some observers expect it to hit 7.0 percent in September due to the impact of Typhoon “Ompong”.
“Latest baseline forecasts have shifted higher for both 2018 and 2019, with risks to the outlook still leaning toward the upside,” Fonacier told reporters.
She stressed that inflation expectations remained elevated “even as the previous monetary policy responses continue to work their way through the economy.”
The Monetary Board’s latest action, Fonacier said, is meant to “further anchor inflation expectations and to safeguard the inflation target over the policy horizon.”
Monetary authorities, she continued, believe that a “tighter … policy stance will help steer inflation toward a target-consistent path over the medium term by reducing further risks to the inflation outlook, including those emanating from exchange rate volatility given the continued uncertainty in the external environment amid geopolitical tensions and the normalization of monetary policy in advanced economies.” she added.
Fonacier also said that Monetary Board members emphasized the need for timely and appropriate non-monetary measures, including rice tarrification, that would further mitigate the impact of supply-side factors on inflation.
“The BSP reassures the public of its strong commitment to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability,” she concluded.
Central bank Assistant Governor Francisco Dakila Jr., meanwhile, explained that the MB considered the higher-than-expected August inflation rate, increased prices of rice and other agricultural commodities due to Typhoon “Ompong,” and higher global crude oil prices in deciding to raise the consumer price growth forecast for this year and the next.
The adjustment, he added, was “partly tempered by lower GDP (gross domestic product) growth in the second quarter and latest monetary policy adjustments by the BSP.”
GDP growth fell below expectations in the second quarter at 6.0 percent, bringing the first half expansion to an average of 6.3 percent—under the government’s 7.0-8.0 percent target.
Commenting on the latest rate hike, analysts from London-based research consultancy Capital Economics, ING Bank Manila, and Japan’s Nomura all said that continued monetary policy tightening was likely.
Capital Economics senior Asia economist Gareth Leather said there were signs that high inflation was starting to dent the popularity of President Rodrigo Duterte. He also noted that the government had recently stepped up measures to bring inflation down, including easing restrictions on food imports, and the lifting of non-tariff barriers on some commodity imports.
These measures, however, will take time to make an impact and Leather said he expected inflation to rise further over the coming months, with the headline rate set to reach around 7 percent by the end of the year.
“If we are right, then further rate increases seem only a matter of time,” he added.
ING Bank Manila senior economist Joey Cuyegkeng, meanwhile, said the BSP could be prompted to continue tightening as inflation expectations would remain elevated going into 2019.
“[I]t will be imperative for non-monetary policy measures to help alleviate prices pressures as we approach the all-important Christmas season, a crucial turning point ahead of the mid-term election in May,” he said.
Nomura economist Euben Paracuelles, for his part, said the BSP will likely raise rates anew before the year ends “given its clear hawkish signals and its forecast that inflation could remain above target again next year.”
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