Philippines: BSP delivers strongest policy action in 10 years to fight inflation

MANILA, Philippines — As widely expected, the Bangko Sentral ng Pilipinas on Thursday made good on its vow to undertake a “strong” follow-through policy action to fight rising inflation after it raised its benchmark rates by 50 basis points, the biggest rate hike in a decade.

The latest round of monetary tightening brings the BSP’s policy rate to 4 percent, joining other Asian central banks in increasing borrowing rates in recent months.

This is the third time the BSP hiked interest rates this year. The last time the BSP jacked up its key rate by 50 bps instead of the traditional 25 bps adjustment was in July 2008 when inflation hit a multi-year high.

“In deciding to raise the BSP’s policy interest rate anew, the Monetary Board noted that latest baseline forecasts have shifted higher over the policy horizon, indicating some risk of inflation exceeding the target in 2019,” BSP Governor Nestor Espenilla said.

“For these reasons, the Monetary Board deemed stronger monetary action to be necessary to rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects, even as the previous monetary policy responses continue to work their way through the economy,” Espenilla added.

“Favorable conditions arising from sustained domestic growth also suggest that the economy can accommodate a further tightening of monetary policy settings,” he continued.

Higher interest rates discourage people from borrowing money and from spending, causing a decline in demand which, in turn, tempers inflation and can even slow down the country’s economic growth.

Inflation jumped to 5.7 percent in July, higher than June’s 5.2 percent and the fastest pace in over five years. Year-to-date, inflation averaged 4.5 percent, still above the BSP’s 2-4 percent target band.

People have blamed soaring prices on the Tax Reform for Acceleration and Inclusion law, which raised excise levies on fuel, “sin” products and sugary beverages, among others.

Supply-side factors like higher global oil prices—exacerbated by the continuing depreciation of the peso—are also pushing up commodity prices. The country’s economic managers, meanwhile, have pointed out that an elevated inflation is typical of a rapidly expanding economy.

Citing “upside risks,” the BSP also on Thursday revised its inflation forecasts to 4.9 percent from its previous estimate of 4.5 percent for 2018, and to 3.7 percent from 3.3 percent for next year.

“The central bank reiterated that it is prepared to take strong measures to tackle inflation, which suggests that further hikes are likely,” London-based Capital Economics said in a commentary. “However, with inflation set to peak soon, there are reasons to think the BSP is approaching the end of its tightening cycle.”

For ING Bank Senior Economist Joey Cuyegkeng, the BSP is not done with raising rates, adding that hike and continued hawkish stance should support the peso, which is trading near its lowest level in 12 years.

“With the peak of inflation still ahead, inflation expectations are unlikely to stabilize anytime soon. Further monetary tightening would be needed to ensure that such expectations become well-anchored,” Cuyegkeng said.

‘Not anti-growth’

The BSP’s aggressive policy move came hours after the release of second quarter economic growth data, which posted an unexpected slowdown of 6 percent.

But for Espenilla, the April-June growth figure was still a high number.

“Certainly we are concerned about the country’s growth prospects and let me also say that 6 percent GDP (gross domestic product) growth in the second quarter, while below our own estimates and market expectations, is not a low number,” the BSP chief said.

“Our primary mandate is really to keep inflation low and stable… Focusing on inflation right now is not necessarily anti-growth. In fact, one can argue it will sustain growth over the medium term,” he added.

Source: https://www.philstar.com/business/2018/08/09/1841095/bsp-delivers-strongest-policy-action-10-years-fight-inflation#WRLfFUD3rH9RRci9.99