BSP steadies policy despite inflation

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By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) stood pat on borrowing rates on Thursday despite mounting expectations of a hike, saying the economy does not need a fresh stimulus even as inflation is expected to pick up further.

The Monetary Board kept policy settings unchanged at its second review for the year. Rates stand at 3.5% for the overnight lending rate, 3.0% for the overnight reverse repurchase rate, and 2.5% for the overnight deposit rate.

“The Monetary Board’s decision is based on its assessment that while recent inflation outturns show an elevated path in 2018, the latest baseline forecasts continue to show inflation remaining within the inflation target in 2018 and moderating further in 2019,” BSP Governor Nestor A. Espenilla, Jr. said during yesterday’s briefing.

Robust domestic demand is also expected to perk up prospects for the domestic economy, the central bank chief added.

The BSP last hiked policy rates in September 2014, although operational cuts were introduced in June 2016 for the shift to an interest rate corridor regime.

Five of 12 economists asked by BusinessWorld last week betted that the BSP will start raising rates this month, with the tightening move seen to help contain inflation and lend some strength to the peso, which has been depreciating against the dollar.

Inflation surged to 3.9% in February to a fresh three-year high as it bore the “full pass-through cost” of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act implemented on Jan. 1.

Overall price spikes averaged 3.7% for the first two months under the 2012 base year, hovering on the high end of the BSP’s 2-4% target band for the full year.

“Today, we don’t see evidence of propagation of inflationary pressures that would threaten our projected path by 2019 of inflation coming down to within-target levels. Nonetheless, there are risks to that outlook,” Mr. Espenilla said.

“[W]e are not being sanguine about the outlook at all. We continue to closely monitor the situation, and the Monetary Board stands ready to act quickly in response to shifting conditions…” he added.

“The alternative scenario where there is a shift in inflationary expectations, a broadening of inflationary pressures… is what we are watching out for. If it happens, that’s the one that will potentially move the MB to change the monetary policy stance towards tightening,” Mr. Espenilla added.

The BSP’s decision also followed a 25-basis-point increase in rates in the United States, with the Federal Reserve hinting at least two more hikes within the year as part of further normalization of policy. Reuters reported that new Fed chair Jerome H. Powell said the outlook for the US economy has “strengthened” in recent months.

Mr. Espenilla maintained that the Philippines is pursuing an “independent” monetary policy driven by domestic conditions, noting that authorities need not match tightening moves made by the Fed.

The BSP on Thursday also raised its inflation estimates anew, but sees price pressures easing by 2019.

BSP Deputy Governor Diwa C. Guinigundo said monetary authorities expect inflation to average 3.9% this year from 3.8% previously under the 2012 base year. By 2019, price increases are seen averaging three percent from 3.1%.

Under the 2006 base, inflation is at 4.5% for this year and 3.5% for 2019.

The central bank expects higher food prices and the weaker peso to keep overall price increases moving even faster in the coming months.

However, Mr. Guinigundo said slower growth in world crude prices, as well as rice tariffs and cash transfers should help mitigate inflation.

TRAIN imposed an additional P2.50 excise tax per liter of diesel and P3/liter for kerosene, which came at a time of three-year highs for world crude prices. The new law also introduced additional taxes on cars, coal, sugar-sweetened drinks and a host of other items that likely drove up prices of other widely-used goods and services.

“So far, we have not seen a widespread petition for higher wages and transport fares,” Mr. Guinigundo added.

Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, said the BSP has “always been dovish” on policy rates.

“I still think they will not hike simply because their expectation of the return to the target range remains the crucial decision point… If inflation is perceived controlled, I see no rate hike even maybe by 2H 2019,” Mr. Asuncion said when sought for comment.

The central bank likewise sees no rush to tweak rates, as these remain supportive of economic growth.

“I don’t think the economy needs further monetary stimulus. If we were able to grow by 6.7% in 2017 without the benefit of the ‘Build, Build, Build’ program, how much more can we grow for 2019-2022 with this fiscal stimulus?” Mr. Guinigundo said.

“The economy is robust and very resilient enough to be able to sustain its economy momentum even without monetary stimulus.”

The government intends to spend around P1.1 trillion on public infrastructure this year, which is expected to spur 7-8% economic growth in 2018.

The BSP will hold its next rate-setting meeting on May 10, its third for 2018.

The US Federal Reserve raised interest rates on Wednesday and forecast at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening.

In its first policy meeting under new Fed chief Jerome Powell, the US central bank indicated that inflation should finally move higher after years below its two-percent target and that the economy had recently gained momentum.

The Fed also raised the estimated longer-term “neutral” rate, the level at which monetary policy neither boosts nor slows the economy, a touch, in a sign the current gradual rate hike cycle could go on longer than previously thought.

“The economic outlook has strengthened in recent months,” the Fed said in a statement at the end of a two-day meeting in which it lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50-1.75%.

Mr. Powell, who took over from former Fed chief Janet Yellen in early February, said the central bank was staying on a path of gradual rate increases but needed to be on guard against inflation.

“We are trying to take the middle ground here,” Mr. Powell said in a press conference after the end of the policy meeting, adding that there were no signs the economy was on the cusp of accelerating inflation.

“The guidance in terms of the future rate hikes is a touch more hawkish than originally expected. 2019 looks like we’re going to get a faster pace of rate hikes,” said Matt Miskin, a market strategist at John Hancock Investments.

“This new Fed chairman is starting with a bit of a hawkish tone as he takes leadership.”

The rate hike was the latest step away from years of stimulating the world’s largest economy in the wake of the 2007-2009 financial crisis and recession.

The Fed tightened policy three times last year. — with a report from Reuters