BSP tightens anew to temper inflation

By Melissa Luz T. Lopez
Senior Reporter
THE Bangko Sentral ng Pilipinas (BSP) raised rates yesterday after a similar move in May in a bid to arrest future inflation and keep local yields competitive.
The Monetary Board raised policy settings by another 25 basis points (bp) during their fourth review for the year. Rates now stand at 4% for the overnight lending rate, 3.5% for the overnight reverse repurchase rate, and 3% for the overnight deposit rate.
“In deciding to raise the BSP’s policy interest rate anew, the Monetary Board noted that inflation expectations remained elevated for 2018 and that the risk of possible second-round effects from ongoing price pressures argued for follow-through monetary policy action,” BSP Governor Nestor A. Espenilla, Jr. said during Wednesday’s briefing.
The BSP also tightened rates by 25bp during the May 10 meeting. Back then, policy makers saw adjusting benchmark yields “will help arrest” possible second-round effects of tax reform, as it would temper inflation expectations.
Now, policy makers see inflation rising further due to “future wage and price outcomes.”
“The BSP is prepared to take further policy action as needed to achieve its price and financial stability objectives,” Mr. Espenilla added.
Prices of widely used goods rose by 4.6% in May, the fastest climb seen in at least five years. This brought the year-to-date inflation tally to 4.1%, higher than the central bank’s 2-4% target.
Four of 10 economists polled by BusinessWorld last week said the BSP will likely raise rates further to catch up with above-target inflation and rising global yields as well as to lend some strength to the peso, which has been depreciating versus the dollar.
Mr. Espenilla noted that they are observing “more volatility” in the exchange rate — which ended yesterday at P53.48 per dollar — which warrants attention as this “potentially adds” to inflation dynamics.
The BSP’s decision also came a week after another 25-bp increase in rates in the United States, with Federal Reserve chair Jerome H. Powell hinting at more rate hikes in the coming months as the US economy performs “very well.”
Meanwhile, a further reduction in bank reserves was not discussed during Wednesday’s meeting, Mr. Espenilla said.
SLOWER INFLATION
The central bank expects slower inflation momentum over the next few months.
BSP Deputy Governor Diwa C. Guinigundo said they now expect inflation to average 4.5% this year, lower than the previous 4.6% forecast but still above the government’s 2-4% target for the year. By 2019, price increases are seen as averaging 3.3% from 3.4% previously.
Inflation is also seen to rise further within June to August owing to higher oil prices, coupled with higher minimum wages as well another P2.50 increase in excise taxes per pack of cigarettes, Mr. Guinigundo added.
Meanwhile, economic activity is seen to remain robust for the remaining quarters, sustaining the momentum from the 6.8% during the first quarter.
“We’re still looking out whether inflationary trends will further broaden and whether there will be second-round effects. That remains to be seen,” Mr. Espenilla added. “Right now, the action taken in our view is sufficient for the information we see at this point in time.”
“It’s still a very complex environment and there are uncertainties. What the BSP is signalling to the market is that first and foremost, we really put a lot of focus on hitting our inflation target. This year seems like it is no longer possible but definitely, we’d like to hit the target next year.”
Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, initially expected that the BSP will stay on hold but noted that markets have been “so volatile” so far.
“Thus, with so much uncertainty ahead, I am expecting more moves to stabilization with the BSP’s move to hike once more. I am expecting more hikes at this point,” Mr. Asuncion said when sought for comment.
“It is clear that their role is to help stabilize an unstable market to eventually guard economic growth.”
Analysts at Capital Economics, however, said the BSP’s latest hike may be the last for now. “The main reason why we suspect the central bank will not rush to hike rates again is that inflation is close to peaking.”
The central bank last introduced back-to-back rate hikes in July and September 2014, at a time when inflation was breaching its 3-5% target.