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Central bank fires off third rate hike

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BSP
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By Melissa Luz T. Lopez
Senior Reporter

THE Bangko Sentral ng Pilipinas (BSP) raised rates anew yesterday in a more aggressive move as expected, to temper inflation amid signals that prices could remain elevated until next year.

The Monetary Board raised policy rates by 50 basis points (bp) on Thursday, marking the third consecutive tightening move this year as policy makers wanted to rein in price expectations.

This is also the central bank’s strongest response in a decade. The last time the BSP raised rates by 50bp in one go was in July 2008, which saw inflation surge to a 17-year high at 12.2% against a 3-5% target that year.

Rates now stand at 4.5% for the overnight lending rate, 4% for the overnight reverse repurchase rate, and 3.5% for the overnight deposit rate.

“In deciding to raise the BSP’s policy rate anew, the Monetary Board noted that latest baseline forecasts have shifted higher over the policy horizon, indicating some risk of inflation exceeding the target in 2019,” BSP Governor Nestor A. Espenilla, Jr. said in a media briefing yesterday.

The BSP tightened rates by 25bp each during its May and June meetings, at a time when monthly inflation started to log beyond four percent.

Inflation expectations — which play a huge part in terms of price movements — remain “elevated” as of now. The stronger adjustment is likewise seen to “prevent sustained supply-side price pressures,” even after previous tightening moves.

Prices of widely used goods surged to 5.7% in July, beating market expectations which brought the seven-month average to 4.5%, well above the 2-4% target range.

All 14 economists polled by BusinessWorld last week were sure that the central bank will raise interest rates this week, but were torn as to whether it will involve a typical 25bp increase or stronger. More analysts bet on a 50bp hike following the release of July inflation data on Tuesday.

“The Monetary Board believed that the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation…,” Mr. Espenilla added. “Favorable conditions arising from sustained domestic growth also suggest that the economy can accommodate a further tightening of monetary policy settings.”

Thursday’s move is also in keeping with Mr. Espenilla’s hints of a “strong policy response,” versus a “measured” approach previously.

Meanwhile, the BSP chief said he has let go of plans to reduce bank reserves, saying that the 200bps cut introduced this year is sufficient for now. Mr. Espenilla has said the central bank will introduce fresh reserve cuts by next year, or when inflation returns to within target.

FASTER INFLATION
The central bank also expects further price spikes over the coming months.

BSP Deputy Governor Diwa C. Guinigundo said inflation is seen averaging 4.9% this year, versus a 4.5% estimate during its June meeting. The pickup is due to the P1 provisional increase in jeepney fares, higher water rates, the scheduled increase in tobacco excise tax, and higher Dubai oil prices.

By 2019, inflation will ease to 3.7%, although faster than the previous 3.3% forecast. Inflation is also seen to average 3.2% by 2020, against a 2-4% target range.

The BSP also noted the need for other government agencies to implement “non-monetary measures” to soften future price increases. The latest estimates do not factor in the passage of the rice tariffication bill, which the central bank said could bring down inflation by 0.2% if implemented during the fourth quarter.

The measure can also trim inflation down by 0.6% for 2019 once cheaper rice is imported to augment dwindling supply of the staple. Rice accounts for nearly a tenth of the consumer basket used in measuring inflation.

Mr. Espenilla said that while inflation is currently “on the high side,” authorities are carefully watching developments and is ready to take necessary actions “as needed.”

GROWTH INTACT
Central bank officials are confident the tightening moves — which cumulatively raised rates by 100bps so far this year — will not stunt overall economic growth.

“Certainly we are concerned about the country’s growth prospects. We also say that 6% GDP (gross domestic product) growth, while below our own estimates, is not a low number. It’s pretty decent growth by an economy, especially during this time of uncertainty,” Mr. Espenilla said, while stressing that price control is the BSP’s main mandate.

“We also argue that focusing on inflation right now is not necessarily anti-growth. One can argue it will sustain growth over the medium term.”

The Philippine economy expanded by six percent during the second quarter, well below market expectations and the state’s 7-8% goal. Still, Mr. Espenilla said the Philippine economy “continues to be strong” and can weather higher borrowing rates.

The BSP chief noted there are signs that lending rates “have started rising” to mirror upward adjustments in the benchmark rate, although pointed out that money supply remains “adequate.”

Still, bank analysts said this might not be the last tightening move from the BSP.

“We welcome BSP’s 50bps hike and its readiness to act further,” ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng said.”We believe that this is not the end of BSP’s tightening as the immediate objective to anchor inflation expectations would need further action since inflation is yet to peak and would remain elevated for the rest of the year and early 2019.”