CITING the need to ease inflationary pressures, the Bangko Sentral ng Pilipinas (BSP) decided to continue its tightening cycle by approving a 25-basis-point hike during its meeting on Thursday.
At its meeting on monetary policy, the Monetary Board effectively brought its overnight reverse repurchase (RRP) interest rate to 4.75 percent, from 4.5 percent. Interest rates on the overnight lending and deposit facilities were raised accordingly.
BSP Officer in Charge Maria Almasara Cyd Tuaño-Amador said that the latest inflation forecast point to the possibility that the rate will settle within the target band of 2 to 4 percent next year and in 2020, several developments may cause inflation to accelerate.
“After considering the impact of nonmonetary measures including the rice tariffication bill and the suspension of the oil excise tax, the Monetary Board decided to raise the policy rate by 25 basis points given the upside risks to the inflation outlook and given that inflation expectations have remained elevated as supply side and possible wage pressures continue to drive price developments,” Amador said.
The BSP official said the Monetary Board deemed it necessary to respond with “proactive policy action” to temper the risks to the inflation outlook.
She cited, in particular, the continued uncertainty caused by tighter global financial conditions and trade tensions among major economies.
Despite the “disappointing” GDP growth in the third quarter, Amador said the country’s economy could still handle another rate hike.
“The Monetary Board believes that prospects for the domestic economy remain generally favorable and allow some scope for a measured adjustment in the policy rate to rein in inflation expectations and preempt further second-round effects,” she said.
The lower-than-expected GDP growth of 6.1 percent in the third quarter prompted some analysts to call for a pause in the BSP’s tightening cycle.
“We think the price stability objective can still be firmly safeguarded because the growth prospects of the economy continue to be cautiously optimistic,” Amador said.
Revised inflation forecasts
BSP officials also announced their new inflation forecasts for this year and the next two years, with the rate expected to settle within the government’s target in 2019 and 2020.
For this year, the BSP revised upward its inflation forecast to an average of 5.3 percent, from 5.2 percent. This projection took into account international oil prices, adjustments in transport fares, updates in the latest inflation print and the third-quarter growth rate.
Inflation is now at an average of 5.1 percent in the first 10 months of the year. This means that the BSP expects inflation to average at 6.3 percent in the last two months of the year. Inflation in October was steady at 6.7 percent.
For 2019, the BSP sees inflation settling at 3.5 percent, from its previous forecast of 4.3 percent.
Officials said the downward adjustment in the 2019 forecast was a result of recent developments, particularly the approval of the rice tariffication law in the Senate. For 2020, the BSP expects the inflation rate to reach 3.3 percent, from 3.2 percent.
The BSP remained in a hawkish tone on Thursday, saying the Monetary Board will continue to emphasize the need for follow-through nonmonetary measures to mitigate the impact of supply side factors on inflation.
“The BSP remains prepared to take appropriate policy actions as needed to ensure the achievement of its price and financial stability objectives,” Amador said.
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