BSP signals ‘prudent’ policy steps up ahead

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By Melissa Luz T. Lopez
Senior Reporter

THE CENTRAL BANK will be “prudent” in setting monetary policy this year, with an official hinting that a pause in rate hikes could be in the cards now that inflation has been dropping.

“We are seeing quite a number of disinflationary forces in the economy… [W]e’re now within the target range, which means that the central bank can afford to allow previous policy adjustments to work their way through the system, and also monitor closely its next policy actions,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Maria Almasara Cyd Tuaño-Amador said before the Tuesday Club meeting.

Reading a speech on behalf of BSP Governor Nestor A. Espenilla, Jr., Ms. Tuaño-Amador noted that latest inflation readings have been “encouraging” so far.

Coming from a nine-year-high 6.7% inflation in September and October last year, overall price increases eased to six percent in November and then to 5.1% in December.

Central bank officials now expect 2019 inflation to average 3.2%, well below last year’s 5.2% average to return to the 2-4% target band.

Ms. Tuaño-Amador noted that risks affecting consumer prices are now “balanced,” versus last year’s mix of supply-side pressures that pushed inflation to multiyear highs.

The BSP said monetary authorities are approaching 2019 with “cautious optimism,” citing the country’s economic footing against external risks which could weigh on prospects for sustained expansion.

Key risks to the outlook include “uncertain” timing and magnitude of future rate hikes by the United States Federal Reserve, escalating trade tensions between the US and China which could dampen global economic activity, and disruptive advances in technology.

“To my mind, policy-making in this time of uncertainty entails two things, namely: our ability to build on our strengths and our flexibility to look forward and anticipate emerging challenges,” Mr. Espenilla was quoted as saying.

“Data-dependent monetary policy, guided by inflation forecasts, will be timely and prudent.”

The Monetary Board raised key interest rates five times last year totalling 175 basis points (bp) in order to arrest surging inflation. This brought the key policy rate to 4.75%, the highest in nearly a decade.

The BSP will hold its first rate-setting meeting for this year on Feb. 7. Policy makers decided to maintain benchmark rates in their December review, amid signs that inflation is finally on its way down.

In another development, Mr. Espenilla is back to work as governor since Monday after a three-week medical leave. The central bank chief, who is battling tongue cancer, has been limiting his public appearances and speaking engagements.

Last week, the BSP chief also signalled that the economy is now ripe for fresh cuts in bank reserves as price spikes ease, which may follow two 100bp reductions introduced in 2018. The reserve requirement now stands at 18% of a bank’s total deposits.