Conditions rife for first BSP rate hike since 2014

BANGKO Sentral ng Pilipinas (BSP) Governor Nestor Espenilla (Photographer: Veejay Villafranca / Bloomberg)

After months of reiterating the “appropriateness” of the Bangko Sentral ng Pilipinas’s monetary-policy stance, the latest statement from the BSP governor may have raised the possibility of a rate hike sooner to address inflationary pressures in the economy.

BSP Governor Nestor A. Espenilla Jr. said inflation pressures brought about by the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Act and rising oil prices will be “at the center” of their discussion in the next monetary-policy meeting.

“There’s been a lot of significant developments since the December policy review that we need to consider in the coming February review.  We have been updating the data and evaluating various price surveys to gain insight on the overall impact on the inflation outlook,” Espenilla told reporters.

“We continue to continue to see the upward inflationary effects as transitory.  However, we are carefully assessing next-round effects and how inflation expectations could be affected.  These considerations will be at the center of the coming policy discussions,” he added.

Inflation has been in check in 2017, averaging at 3.2 percent—well within the government’s target range of 2 percent to 4 percent. However, economists have flagged risks to inflation coming into 2018, due to the effects of the TRAIN implementation and rising oil prices, plus taking into consideration the weaker peso.

In particular, for January, the BSP sees inflation hitting 3.5 percent to 4 percent, nearing the ceiling of the government’s target range of 2 percent to 4 percent for the year.

“The ability to meet the inflation target comfortably and mitigating the upside risks is very important to the BSP,” Espenilla said.

ING Bank Manila economist Joey Cuyegkeng said there is growing concern, not only about the direct impact of higher excise taxes, but also about second-round effects.

“BSP turned cautious a few weeks back. And the recent statement seems to have raised such concerns with the combined price pressures of higher international oil prices, weaker peso and excise taxes,” Cuyegkeng told the BusinessMirror.

“We have raised the possibility of a March rate hike, although our current base case is for a tightening in the second quarter [May meeting],” he added.

Cuyegkeng further said these concerns, taken with the “surprisingly high” BSP January inflation forecast, may presage a BSP action sooner.

The BSP has been keeping monetary-policy rates unchanged since 2014 to also mitigate inflation pressures. Inflation has averaged 4.1 percent during that year.

Moody’s Analytics economist Veasna Kong also told the BusinessMirror that, in addition to the impact of the weakening peso and tax increases, demand-side pressures are likely to pick up on the back of President Duterte’s infrastructure-development program.

“We expect these developments to increase price pressures, with inflation likely to test the upper end of the Central Bank’s target range in 2018,” Kong said via e-mail.

The economist added that the strength of the economy is such that it no longer requires accommodative monetary policy, especially in light of looming cuts to the reserve requirement ratio.

The BSP will be having its next monetary-policy meeting on February 8. This will be the first monetary policy-setting meeting of the BSP for 2018.

In its last policy meeting for 2017, the BSP decided to keep the 3-percent rate on its overnight reverse repurchase facility, with unchanged settings on corresponding interest rates on overnight lending and deposit facilities.

The much-talked-about reserve requirement ratio of banks was also kept steady at 20 percent.

The BSP also maintained its inflation forecasts unchanged from its last meeting, particularly at 3.2 percent for last year, 3.4 percent for 2018 and 3.2 percent for 2019.

All forecasts are within its target range.



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