The Bangko Sentral ng Pilipinas (BSP) on Thursday again kept interest rates steady, but it expressed readiness to change its policy stance should inflation accelerate in the coming months.
The Monetary Board, in its second monetary-policy meeting of the year, decided to maintain its policy rate steady at 3 percent during the meeting. Corresponding rates on overnight lending and deposit facilities were also kept unchanged.
BSP Governor Nestor A. Espenilla Jr. said in his post policy statement that the decision of the Monetary Board was based on their models showing inflation “easing naturally” going forward in 2019.
Inflation expectations are now more manageable than the projections seen in the previous monetary-policy meeting, after economic managers decided to recalibrate the consumer price index (CPI) basket.
Following the Philippine Statistics Authority’s (PSA) decision to update the CPI base year from 2006 to 2012, the BSP now projects inflation to hit 3.9 percent.
In its February exercise, the BSP said inflation is expected to breach the 2-percent to 4-percent target rate and hit 4.3 percent. This, however, is based on the 2006 CPI base year.
BSP Deputy Governor for the Monetary Policy Sector Diwa C. Guinigundo on Thursday said this 2006-based CPI forecast is equivalent to 3.8 percent using the 2012 CPI basket.
For 2019, the BSP projects inflation to go down to 3 percent, from the 3.1-percent forecast earlier as adjusted to the 2012 CPI base. The government also carries the 2-percent to 4-percent target inflation range up until 2020.
Espenilla, however, said the BSP observed that the risks to the inflation outlook remain tilted to the upside, as price pressures emanate from pending petitions for adjustments in minimum wages and transportation fares.
Pressures could have been higher, the BSP chief added, if not for inflationary mitigating factors, such as institutional arrangements in setting transportation fares and minimum wages, unconditional cash transfers as well as transport subsidies.
‘Ready to act quickly’
A difference in the governor’s post monetary policy statement, however, was seen in Espenilla’s final sentences, expressing readiness to act quickly should second-round effects come to fruition.
“The Monetary Board noted that inflation expectations have started to rise and will, therefore, need to be monitored closely in the coming months,” Espenilla said.
“It was also observed that economic growth remains solid enough to absorb some policy tightening if warranted,” he added.
Espenilla also said broader second-round effects in the inflation front will be particularly monitored by the Central Bank.
“If it happens [stronger second- round inflationary effects], that is the one that will move the Monetary Board to change the monetary-policy stance to tightening,”
Espenilla said.
The governor added that the Monetary Board stands ready to “act quickly” to shifting conditions.
“The Monetary Board stands firm in its intent to take immediate and appropriate measures to ensure that the monetary-policy stance continues to support the BSP’s price and financial stability objectives,” Espenilla said in his statement.
This is the first time that the BSP directly addressed potential tightening measures and the potential timing of their course of action, contrasting earlier policy statements that emphasize the “appropriateness” of monetary-policy settings for the given review period.
“We need to convey to the market that if it warranted, the Monetary Board is prepared to tighten monetary policy. This is to address the continuous fears of analysts that it looks like the bsp is behind the curve. The BSP is not behind the curve,” Guinigundo said.