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BSP exec downplays rate hike calls

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Diwa C. Guinigundo
Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Guinigundo says monetary policy may not be appropriate to hem in supply-side inflation pressures.

A CENTRAL BANK official has downplayed calls for a fresh hike in benchmark interest rates in the face of faster inflation, arguing such a move will not arrest supply-driven pressures.

“You don’t use monetary policy to arrest oil prices and the effects of typhoons, or some issues about the rice industry,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said during a press briefing on Friday.

He made the remarks when asked for his views on the latest inflation trends.

May’s 4.6% pace — the fastest in more than five years — came as international crude oil prices hit three-year highs and as rice prices climbed due to dwindling inventories. The latest inflation rate kept year-to-date pace at the 4.1% recorded in the four months to April — still beyond the central bank’s 2-4% forecast for full-year 2018.

A number of bank economists are pricing at least one more rate hike from the BSP within the year which they said is necessary to stem second-round inflation effects of the tax reform law, particularly in terms of higher minimum wages and public transport fares.

On Friday, analysts at Deutsche Bank said they expect four additional tightening moves from the central bank between June and January 2019 in order to curb inflation and prevent the domestic economy from overheating. In fact, the foreign lender said policy makers could be “acting too slowly” in addressing inflation risks, which has kept the peso weak and local yields uncompetitive despite higher benchmark rates.




“While it’s important that you look at headline numbers — which actually tell you history of inflation from the month before — the more important consideration is what lies ahead, what is the forecast of inflation 12 months ahead,” Mr. Guinigundo explained.

“Looking at inflation in 2019 and 2020, we’re back to 2-4%.”

The BSP decided to hike rates by 25 basis points (bp) during the May 10 policy review of its Monetary Board, as inflation continues to breach the 2-4% target. It was the first rate hike in nearly four years which monetary authorities described as a preemptive move to temper inflation expectations in the market. Mr. Guinigundo has said that the increase in rates last May should be “sufficient” to bring inflation back on target by next year, even as monetary authorities have already conceded to missing the target this year, with overall price increases seen averaging 4.6%, so far, for 2018.

He also noted that inflation has been slowing when seen from preceding months. Month-on-month seasonally adjusted inflation slowed from 0.7% in March to 0.2% in May, according to government data.

“[E]ven if the annual reading was 4.6%, the month-on-month (pace) has actually shown a sustained slowdown from January to May,” Mr. Guinigundo said.

“We should focus on that because the momentum is indicated by month-on-month instead of year-on-year,” the BSP official added.

“Market analysts continue to focus on the annual and say this is the highest since 2014, and therefore (say that) the BSP is behind the curve.”

Inflation is also expected to hit its peak earlier than initially projected, with Mr. Guinigundo saying that “there will be changes” to its previous forecast of faster price increases until the end of the year. — Melissa Luz T. Lopez

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