Philippines: BSP raises interest rates anew; expects above-target inflation until 2019

• Sep 28, 2018

MANILA, Philippines (Update 2, 6:32 p.m.) — As widely expected, the Bangko Sentral ng Pilipinas on Thursday raised anew its benchmark rates by another 50 basis points to tame inflation, which monetary authorities expect to soar above official target for two straight years.

The latest round of monetary policy tightening brings the central bank’s policy rate to 4.5 percent. The BSP has lifted its key rates by cumulative 1.5 percentage points since May.

Thursday’s move came after the US Federal Reserve and Bank Indonesia jacked up borrowing rates. With two meetings left to set policy this year, the BSP is setting the stage for its most forceful action against inflation since 2000.

“The monetary board recognized that a further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures,” the BSP said.

During the time when inflation was not yet officially targeted by the BSP, rates were hiked by as much as 400 basis points in one meeting in October 2000 to strengthen the peso.

It was only in 2001 when the central bank formalized an inflation-targeting framework that has since guided its decisions.

Above-target

The central bank still expects inflation to peak this quarter, before tapering down in succeeding months, although it still expects to cap the year with inflation at 5.2 percent, up from 4.9 percent seen in its meeting last month.

Inflation for 2019 could hit 4.3 percent, up from 3.7 percent original forecast. By 2020, inflation is seen to slow to 3.2 percent.

The BSP has set a 2-4 percent target range over the next three years.

Philippine inflation jumped to an over nine-year high of 6.4 percent in August, amid food supply bottlenecks, a weak peso and recent surge in international oil prices. Higher excise taxes slapped on other goods last January also contributed to inflation.

In the first eight months, inflation averaged 4.8 percent, well above the central bank’s target band.

In adjusting its inflation outlook, the BSP said it took into account the higher-than-expected August inflation print, projected spike in prices of farm products due to Typhoon Ompong’s damage to agriculture and rising global oil prices, among others.

‘Non-monetary measures’

The BSP then highlighted the need for speedy implementation of non-monetary measures to arrest supply-driven price pressures.

While the BSP awaits government solutions to supply constraints, central bank deputy governor Chuchi Fonacier said a rate hike is needed to “anchor inflation expectations” of the public that have “remained elevated.”

“With supply-side forces expected to continue to drive inflation in the coming months, inflation expectations have remained elevated amid indications of second-round effects,” Fonacier said.

“Meanwhile, domestic demand conditions have generally held firm, even as the previous monetary policy responses continue to work their way through the economy,” she added.

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.

The central bank’s rapid-fire interest rate hikes from May to August have so far induced an 84.2 bps increase in lending rates, BSP sector-in-charge Francisco Dakila Jr. said.

“Although inflation is expected to slow down in the fourth quarter, the BSP may still be called to enact another round of rate hikes as inflation expectation remain elevated going into 2019,” said Nicholas Mapa, senior economist at ING Groep NV.

Separately, Euben Paracuelles, analyst at Nomura, said the BSP’s policy statement was “decisively hawkish.”

“Overall, we continue to see risks that will BSP will hike again this year given its clear hawkish signals and its forecast that inflation could remain above target again next year,” Paracuelles said.

In a Pulse Asia survey released also on Thursday, 65 percent of respondents believe inflation is an urgent concern for the government. — Ian Nicolas Cigaral

Source: https://www.philstar.com/business/2018/09/27/1855225/bsp-raises-interest-rates-anew-expects-above-target-inflation-until-2019#4Z3if0PgifitPC0P.99