BSP raises rates in ‘proactive’ move

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By Melissa Luz T. Lopez
Senior Reporter

THE CENTRAL BANK fired off a softer rate increase yesterday as policy makers saw the need for preemptive action amid global uncertainty, and as price expectations remain elevated back home.

The Monetary Board raised policy rates by 25 basis points (bp) on Thursday, marking the fifth consecutive tightening move this year. This followed back-to-back 50bp increases in August and September and two 25bp increases in May and June, worth a total of 175 bps.

Benchmark rates now range from 4.25-5.25% effective today. The key policy rate is now at 4.75%, the highest since March 2009.

“[T]he Monetary Board decided to raise the policy rate by 25 basis points given the upside risks to the inflation outlook and given that inflation expectations have remained elevated as supply-side and possible wage pressures continue to drive price developments,” BSP Deputy Governor Ma. Almasara Cyd N. Tuaño-Amador said in a press briefing.

A BusinessWorld poll of economists last week resulted in a toss-up, with six betting the BSP will keep rates steady and five seeing a good chance for a 25bp hike.

Inflation steadied at 6.7% in October, matching September’s print which was a nine-year high. Still, it ended a steady rise in consumer prices seen since the start of the year. Food prices posted a slower year-on-year increase last month, with economic managers noting that state interventions to boost food supply have started to take effect.

Month-on-month inflation likewise eased to 0.3% coming from 0.9% logged in September.

Last week, BSP Governor Nestor A. Espenilla, Jr. said the October print affirms their view that price pressures are “finally moderating,” while Deputy Governor Chuchi G. Fonacier noted there is room for the central bank to stay on hold as prices of goods have been easing even in early November.

“The Monetary Board deemed it necessary to respond with proactive policy action to help temper the risks to the inflation outlook, including those emanating from the continued uncertainty in the external environment amid tighter global financial conditions and trade tensions among major economies,” Ms. Tuaño-Amador said yesterday, adding that the central bank’s decision already factors in an expected rate hike in the United States.

Economists who noted the need for another hike said the move is necessary to further cool inflation expectations and ensure that local yields will remain competitive even after the US Federal Reserve raises rates anew in December.

Others, however, were concerned about how rapid inflation and rising interest rates could further dampen economic growth, which settled at a three-year low of 6.1% during the third quarter.

Monetary policy makers also said they found it appropriate to tighten rates further despite a slower-than-expected economic growth, as the above-six percent rate shows the economy stands “resilient and robust” despite rising borrowing costs. Loan growth continues to be healthy and supportive of expansion, Ms. Tuaño-Amador said.

Alex Holmes, Asia economist at Capital Economics, said the BSP’s latest rate hike may be the last this year “with inflation set to fall back over the coming months.”

The central bank said they now expect inflation to clock in slower in the coming months, with price increases seen to settle below four percent over the next two years with latest measures seen to bring costs down.

Dennis D. Lapid, director of the BSP’s Department of Economic Research, said inflation is expected to settle at 5.3% this year, higher than the 5.2% expected previously due to the recently-announced increase in transport fares for public jeepneys and buses, as well as recent movements in global oil prices.

“The latest view is we’re looking at a deceleration in inflation,” Mr. Lapid said.

Inflation averaged 5.1% from January-October, well above the 2-4% target band for 2018.

By next year, inflation is expected to settle at 3.5%, back within target and lower than the 4.3% previous estimate. In 2020, prices are seen to rise by 3.3% from 3.2%.

The “substantial” reduction in the forecasts factor in the recent approval of the rice tariffication bill, which is nearing enactment after clearing the Senate on Wednesday. Authorities said this could reduce inflation by 0.7% in 2019 as the increased supply of the crop will bring down rice prices by as much as P7 per kilogram.

Ms. Tuaño-Amador added that the revised forecast also takes into account the suspension of the additional P2 per liter increase in fuel excise tax approved by President Rodrigo R. Duterte recently. These are now factored into the outlook given the “considerable degree of certainty” of their implementation.

Central bank officials also noted that non-monetary measures introduced by the Executive are starting to be felt, as greater food supply is seen to alleviate price pressures. Inflation has been food-driven as of late, according to the Philippine Statistics Authority.

Ms. Tuaño-Amador added that these interventions are expected to have a “very positive impact” on consumer sentiment and behavior. “The efficacy of the non-monetary measures will get some traction as we see the implementation of these programs.”

“It’s also important to understand that these non-monetary measures also can impact on sentiment and consumer behavior. Once you are able to rein in inflation expectations, then price and wage setters will be restrained in demanding higher prices,” she added.

The BSP will hold its final rate-setting meeting for this year on Dec. 13.