The Bangko Sentral ng Pilipinas (BSP) refused to be stampeded into using a blunt instrument to help the economy manage more recent price pressures and kept the rate at which it borrows from or lend to banks unchanged on Thursday.
This means the cost of borrowing from any of the banks for both businesses and household should not spike upward as a consequence and should help keep so-called inflation expectations in check over the next 18 to 24 months.
This developed as the BSP kept the overnight borrowing rate fixed at 3 percent on Thursday, when quite a number of analysts—foreign and local—feared that rampaging inflation of 4 percent in January would compel the monetary authorities to ramp up its lending rate and its term deposit rates, as well.
But the policy-making Monetary Board did hike the forecast inflation rate this year to 4.3 percent from only 3.4 percent to help signal higher but temporary price pressures down the line. The forecast inflation this year pushes past the ceiling of the 2-percent to 4-percent official target to reflect price factors that did not form part of the forecast equation the BSP made only last December.
The last time inflation stood above 4 percent was in 2014, when it averaged 4.1 percent.
In the statement read for BSP Governor Nestor A. Espenilla Jr. by BSP Managing Director for the Monetary Policy Subsector Francisco Dakila Jr., the BSP said the decision was based on the assessment that, while latest baseline forecasts show higher inflation outturns for 2018, the inflation path should moderate and settle within the target range of 2 percent to 4 percent in 2019. Dakila said the impact of the tax -reform adjustments was not included in the 3.4-percent baseline forecast in the December meeting and this explains the ramped-up inflation forecast.
For 2019, the BSP also plotted forecast inflation averaging higher to 3.5 percent, from only 3.2 percent in the December review.
Other factors contributing to the marked rise in forecast inflation include the continued increases in global oil prices as well as the high inflation outturn in January.
Dakila and BSP Deputy Governor for the Resource Management Sector Maria Almasara Cyd Tuaño-Amador said the above-target inflation rate in January was caused by supply-side factors and by that measure, transitory.
Dakila also expressed optimism that second-round effects from the reform measure, known as the Tax Reform for Acceleration and Inclusion, “appear to be well contained.”
“Nevertheless, the Monetary Board observed that the risks to the inflation outlook remain weighted toward the upside, owing mainly to price pressures emanating from possible further increases in global oil prices,” Espenilla said. “The Monetary Board stands ready to take appropriate measures as necessary to ensure that the monetary-policy stance continues to support price and financial stability,” he added.