By Melissa Luz T. Lopez
The BANGKO SENTRAL ng Pilipinas (BSP) continues to have a firm hand on inflation, its chief said amid mounting calls for a more aggressive rate hike next month.
BSP Governor Nestor A. Espenilla, Jr. said monetary authorities have delivered “measured” responses to surging consumer prices through two successive interest rate hikes, coupled with the weekly term deposit auctions, contrary to criticisms that the central bank has been behind the curve in doing so.
Mr. Espenilla said the BSP continues to have “firm monetary control” despite fast-rising inflation, which hit a fresh five-year peak of 5.2% in June to bring the year-to-date average to 4.3%, beyond the central bank’s target.
“Our two successive rate hikes in May and June were measured and deliberate responses to the evolving economic environment and dynamic market conditions meant to help anchor inflation expectations and temper second-round effects, firmly signalling our commitment to ensuring price stability,” Mr. Espenilla said in a speech before the Institute of Corporate Directors on Tuesday.
“These were undertaken even as we await full implementation of appropriate policy response to supply shocks such as the National Government’s social safety net programs.”
The Monetary Board tightened rates through two 25 basis point (bp) increases in its May and June meetings, bringing benchmark rates to 3-4%.
Mr. Espenilla made his latest statement as more economists are seeing another rate hike from the Monetary Board’s Aug. 9 meeting.
Bernardo M. Villegas, economics professor at the University of Asia & the Pacific, said the BSP may raise rates by 50bp next month given the need for a “more aggressive” response to temper inflation pressures.
In a separate report, HSBC economist Noelan Arbis likewise noted that the central bank needs a stronger policy response given that inflation is unlikely to taper off soon. “We believe the ‘June shock’ has broad implications and, as stated above, calls for a more forceful response from the BSP. We expect a 50bp rate hike at its next policy meeting (presumably in August) in recognition that inflation is now significantly higher than initially expected and to show the central bank’s resolve to curtail it as soon as possible,” the global bank said in a note published yesterday.
Mr. Arbis noted that another 25bp hike is already expected by market players, but said taking rates a notch higher in one go would be “more preemptive” than reactive to inflation pressures.
HSBC sees inflation peaking at 5.5% and will remain above four percent monthly until the first quarter of 2019.
The bank economist also sees slim chances for another cut in banks’ reserve requirement until December as conditions turn “less favorable.”
Despite inflation concerns, Mr. Espenilla said the Philippine economy continues to be robust despite concerns both abroad and at home.
Capital outflows observed in recent months are likely temporary, the central bank chief said, noting that long-term prospects still point to sustained growth and solid fundamentals.
“We note that the country’s balance of payments (BoP) position has been posting deficits since 2016 on account of strong foreign currency outflows. This is a reversal from previous BoP surpluses accumulated from the large inflows due to quantitative easing since the global financial crisis,” Mr. Espenilla said.
“With the normalization of US monetary policy and rising global interest rates, we see significant corrections in capital flows that are affecting our BoP and exchange rate. This is compounded by uncertainties posed by the trade war and geopolitical risks,” he added.
“Nevertheless, we view these as short-term macro-stability challenges. Over the medium-term, our sound fundamentals should serve us in good stead.”
Mr. Espenilla also sees above-six-percent growth momentum sustained on the back of manufacturing, strong consumer and government spending, as well as a young, skilled workforce.
The Duterte administration targets to the economy to grow by 7-8% this year, faster than the 6.7% pace seen in 2017.