THE Bangko Sentral ng Pilipinas (BSP) delivered its biggest rate hike in over 10 years on Thursday, as it tries to protect next year’s inflation from steering away from their target range.
The Central Bank also announced its decision to hike both inflation forecasts for 2018 and 2019.
BSP Governor Nestor A. Espenilla Jr., following the Monetary Board’s fifth monetary policy meeting for the year, announced a 50-basis-point hike to their overnight reverse repurchase interest rate.
The hike—which will be effective on Friday, August 10—is the biggest rate hike the BSP has pulled since mid-2008. It also comes on the heels of two 25-basis- point hikes made in the May and June monetary-policy meetings of the BSP, making it the third consecutive meeting for the year with a rate hike action from the country’s central monetary authority.
Espenilla said the strong policy action was made as inflationary pressures were starting to creep up on the 2019 price growth projection.
“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,” Espenilla said in his statement on Thursday.
“Upside risks also continue to dominate the inflation outlook, as the sustained increase in core inflation suggests broadening price pressures amid resilient aggregate demand conditions,” he added.
The governor said the 50-basis-point hike is “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.
He also expressed readiness to “take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability.”
Higher inflation forecasts
BSP Deputy Governor Diwa C. Guinigundo also announced that the BSP decided to hike both inflation forecasts for 2018 and 2019.
In particular, Guinigundo said this year’s inflation is now expected to hit 4.9 percent, from the previous meeting’s projection of 4.5 percent.
In the first seven months of the year, inflation had already averaged at 4.3 percent, with the latest print at 5.7 percent in July.
For 2019 the deputy governor said inflation is expected to hit 3.7 percent, up from the 3.3 percent as earlier forecast.
The BSP also announced their 2020 inflation forecast, which was at 3.2 percent.
While their 2018 forecast is an acceleration, both their 2019 and 2020 forecasts are within the 2-percent to-4 percent target range set by the BSP.
Among the factors behind the higher 2018 projection include the higher transportation and utility fares during the month, as well as the higher taxes on tobacco.
Effect on growth
Espenilla said while the rate hike action toward tighter monetary-policy conditions was stronger for this meeting, their move was not “anti-growth.” This, following the government’s announcement of a 6-percent gross domestic product growth in the second quarter of the year, lower than market expectations.
Espenilla said the main reason BSP is very “vigilant” about keeping inflation on track is the fact that it is a key driver to keeping the economic growth sustainable. He further added that the rate hikes will not compromise the 7-percent to-8 percent growth target of the government in the medium term.
Further action
ING Bank Manila economist Joey Cuyegkeng welcomed BSP’s strong policy action and its readiness to act further.
“BSP delivered an aggressive policy response to anchor inflation expectations as BSP signaled last month. The move also supports the Philippine peso which has contributed to rising inflation,” he said.
Cuyegkeng also said the economy can absorb monetary tightening. He predicted further tightening from the BSP within the year.
“We believe that this is not the end of BSP’s tightening as the immediate objective to anchor inflation expectations would need further action since inflation is yet to peak and would remain elevated for the rest of the year and early-2019,” Cuyegkeng said.