Philippine economy robust enough to absorb higher rates — BSP

• Mar 26, 2018

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has given assurance that the country’s economic growth remains solid enough to absorb higher interest rates, if warranted, as inflation is seen peaking in the third quarter due to transitory effects of the tax reform law.

BSP Governor Nestor Espenilla Jr. told members of the Money Market Association of the Philippines (MART) last Friday that monetary authorities would stay alert to any signs of second-round effects and inflation becoming broader based.

“We stand firm in our intent to take immediate and appropriate measures to ensure that the monetary policy stance supports our price and financial stability objectives. Economic growth remains solid enough to absorb some policy tightening, if warranted,” Espenilla said.

The Philippines has booked 76 quarters of uninterrupted growth with the gross domestic product (GDP) expanding 6.6 percent in the fourth quarter of last year, although at a slower pace than the seven percent growth in the third quarter.

The GDP grew 6.7 percent last year from 6.9 percent, fueled by election-related spending in 2016. The growth was well within the 6.5- to 7.5-percent target set by economic managers for 2017.

The robust growth was achieved amid the benign inflation environment as inflation climbed to 3.2 percent in 2017 from 1.8 percent in 2016 despite elevated oil prices.

The BSP’s Monetary Board last raised interest rates by 25 basis points in September 2014 and has embraced an accommodative stance to support the expanding economy.

The central bank continued to adopt a dovish policy stance, keeping benchmark rates steady during its first two rate-setting meetings this year even if inflation kicked up to its highest level in more than three years at 4.5 percent in February from four percent in January.

This brought the average inflation at 4.2 percent in the first two months of the year, slightly above the two to four percent target set by the BSP for 2018 to 2020.

The last time the target was breached was in 2008 when inflation leapt to 9.3 percent versus the three to five percent target, due to elevated oil and food prices.

“Practicing vigilance, we at the BSP, note that inflation expectations have started to rise and will, therefore, need to be closely monitored in the coming months. Remaining watchful, we acknowledge that on balance, risks to the inflation outlook remain weighted toward the upside,” Espenilla said.

The BSP chief said decisions on the monetary policy stance would continue to be data-dependent.

“Focus will be on domestic conditions while taking into account external developments, only to the extent that these impact the domestic inflation outlook and financial conditions,” Espenilla added.

BSP Deputy Governor Diwa Guinigundo said inflation is expected to peak above the central bank’s two to four percent target by the third quarter before easing back starting in the fourth quarter and should settle within the target by 2019.

Based on the new series using the 2012 base year, the BSP’s Monetary Board sees inflation falling within the target over the next two years. Inflation is seen averaging 3.9 instead of 3.8 percent this year and to three, instead of 3.1 percent, next year.

However, inflation is seen accelerating to 4.5 instead of 4.3 percent this year before easing to 3.5 percent next year using the old series with a base year of 2006.

Guinigundo said monetary authorities have not seen strong evidence of strong effects coming from higher wages and rising transport fares.

Likewise, Guinigundo assured BSP is closely monitoring the inflation of consumer items as it closely watches possible second round effects.

The deputy governor pointed out that only 22.3 percent of the consumer items have inflation exceeding four percent, while 56 percent are within the two to four percent target, and 21.7 percent below two percent.

“There is no evidence at this point that the second round effects, in terms of consumer items, are evident,” Guinigundo said.

Massimo Bassetti, economist at think tank FocusEconomics, said a change of tone could be observed in the statement of the BSP chief as authorities stand ready to hike rates in the coming months.

“It also expressed its belief that robust growth would allow the economy to smoothly absorb a more restrictive monetary stance. As the BSP remains concerned about both inflationary pressures and the strong economic performance, future rate hikes would likely be implemented with a view toward protecting growth prospects,” Bassetti said.

Source: https://www.philstar.com/business/2018/03/26/1800264/philippine-economy-robust-enough-absorb-higher-rates-bsp#xd0cXl1Pz57cRsXF.99