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By Daryll Edisonn D. Saclag, Reporter

Monetary policy seen maintained for now

Posted on October 20, 2014

THE MONETARY BOARD is widely expected to pause on monetary policy tightening at its penultimate meeting for this year on Thursday, but some analysts said further rate hikes are needed to protect 2015’s inflation target.

Nine out of 12 economists and bankers polled by BusinessWorld said monetary authorities will likely shift to neutral gear when they meet on Oct. 23 in order to give effects of previous policy adjustments time to work their way through the economy.

Two said only special deposit account (SDA) rates would be raised, while one called for hikes in both SDA and key policy rates.

“I think there will be no movement on the policy rates for the Oct. 23 meeting. The twin hikes -- SDA as well as overnight borrowing and lending -- in last month’s meeting were aggressive and decisive. BSP will likely take an assessment of recent actions so a hold-off on policy actions is most probable,” Security Bank Corp. economist Patrick M. Ella said.

University of Asia and the Pacific economist Victor A. Abola shared this view, saying: “I believe that inflation has peaked... Besides, crude oil prices in the world market are in three-year lows, and this should provide further impetus to the inflation slowdown.”

Inflation eased to 4.4% in September from a three-year-high 4.9% seen in July and August, but core inflation -- which excludes prices of food and energy which can be volatile -- steadied from August’s 17-month high of 3.4%. The September result brought headline inflation in the first nine months to average 4.4%, past the mid-point of the central bank’s 3-5% target for the year but still below a 4.5% official forecast.

Last Friday, BSP Deputy Governor Diwa C. Guinigundo said the rise in prices of widely used goods could have already peaked for the year and should be “better” for the rest of 2014. “We should be able to see better inflation... in the last three months of 2014,” he said, citing easing of supply-side pressures spurred earlier by weather-related disruptions like floods and Manila’s seven-month truck ban that ended mid-September. “All other things being equal, without strong typhoons like Yolanda or earthquakes, we should be able to see more favorable impact on the inflation path for the rest of the year.”

However, ANZ Bank economist Eugenia Fabon Victorino said risks to BSP’s 2-4% inflation target for next year remain, warranting further tightening of policy settings.

“We expect the Bangko Sentral ng Pilipinas to hike both its policy overnight reverse repo rate and its Special Deposit Account (SDA) rate by 25 bps (basis points) to 4.25% and 2.75%, respectively on Oct. 23,” Ms. Victorino said.

“The expected electricity crisis in 2015 will likely keep inflation expectations above the mid-point of BSP’s lower target range, putting pressure on the central bank to tighten rates further this year.”

For DBS Bank economist Gundy Cahyadi, an increase in the cost of parking money at the central bank’s SDA facility is likely, “given the need to absorb more liquidity from the banking system.”

To control inflation, the central bank this year raised key interest rates by a total of 50 bps to 4% and 6% for overnight borrowing and lending, respectively; SDA rates also by a total of 50 bps to 2.50%; and banks’ reserve requirement ratio by a total of two percentage points.

These policy adjustments helped siphon off excess liquidity in the financial system, with money supply growth hitting 18.5% in August -- a significant slowdown from the nearly 40% seen at the start of the year.

BSP’s Mr. Guinigundo said previous tightening measures should continue to ease growth of domestic liquidity for the remaining months of 2014 to a pace “lower than what we saw for August.”

The central bank monitors domestic liquidity as strong money supply growth boosts consumers’ purchasing power which, if left unchecked, can drive prices of basic goods to rise faster.

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