Central bank keeps door open to more tightening

FURTHER policy tightening remains an option for the Bangko Sentral ng Pilipinas (BSP) as it seeks to temper overall price movements, BSP Governor Nestor A. Espenilla, Jr. said on Tuesday.
“We are hoping to see that inflation momentum will continue to lose steam, which will then be in line with our forecast. We’re also watching out for no further broadening of inflationary pressures to other kinds of commodities,” Mr. Espenilla said during a forum hosted by the Economic Journalists Association of the Philippines yesterday.
“We will have, and we have, kept the door open as well to take further policy action as may be necessary based on the data.”
Inflation hit a fresh multiyear-high 5.7% in July, sustaining a steady ascent for the seventh straight month. This pulled the seven-month average in overall price increases to 4.5%, above the central bank’s 2-4% target range for 2018.
The BSP has blamed supply-side factors such as surging global oil prices, additional excise taxes on certain products that took effect this year, as well as weather disturbances that disrupted food supply as the key reasons behind July price spikes.
Month-on-month, inflation was driven by the P1 provisional increase in jeepney fares as well as higher utility rates.
In response, the BSP fired off its strongest response in a decade by raising interest rates by 50 basis points (bp) in its Aug. 9 meeting. That pushed policy interest rates higher by a cumulative 100bp so far this year to 3.5-4.5%.
In the same forum, Finance Secretary Carlos G. Dominguez III, himself a member of the BSP’s seven-man policy-making Monetary Board, said current policy rates are “totally appropriate,” noting that they are “data driven.”
While the rate hikes have “some effect on the growth rate, we don’t think it’s going to be that serious because the economy is growing at quite a fast rate.”
The Philippine economy remains one of the fastest growing in Asia. But with annual growth slowing to a three-year low of six percent in the second quarter, the challenges are tougher for a government that’s funding a multi-billion dollar infrastructure overhaul and a central bank grappling with high inflation.
However, Mr. Espenilla noted that inflation moment is “actually slowing down”, with monetary authorities expecting inflation to peak by September before easing in 2018’s last three months.
He said that inflation will “probably not hit” six percent, although full-year inflation will remain “elevated” — with the BSP’s latest estimate at 4.9% — before returning to target by 2019.
‘HARD CHOICES’
The BSP chief said it remains on the lookout for latest price drivers and market developments that could shape its next policy decisions.
“What’s more important for the BSP is to send a very strong signal to the whole community that we are very committed to returning inflation path back to target, and we are prepared to deploy our instruments to do that,” Mr. Espenilla said.
“The economy can actually handle it. If we have to make choices, we can make those hard choices.”
Mr. Espenilla has called for “coordinated response” from the government to help ease price pressures, since not all inflationary factors can be addressed by monetary policy.
The government is moving to restore a regular tariff scheme for rice from the current import quota system, a proposal that is estimated to cut retail prices of the staple by P7 per kilogram and cut the inflation rate by 0.4 percentage points.
The measure has cleared the House of Representatives but has yet to be approved by the Senate.
Mr. Espenilla also acknowledged that recent turbulence in peso-dollar trading has emerged as an area of concern for policy makers.
“We are cognizant that the peso can also be subject to excessive volatility, especially in light of global interest rate and exchange rate developments. We are not insulated from those. We have to take this into account,” the central chief said.
The peso has been trading weaker than P53 to the dollar in recent weeks. — Melissa Luz T. Lopez with input from Reuters