THE Bangko Sentral ng Pilipinas (BSP) telegraphed its strong hawkish guidance on Tuesday, repeatedly saying it was “keeping [the] door open” to further possible rate hikes on the premise that the economy is still strong enough to handle higher interest rates.
“We [have and will] keep the door open to take further policy action as necessary based on the data,” BSP Governor Nestor A. Espenilla Jr. told reporters attending the Economic Journalists Association of the Philippines Economic Forum on Tuesday.
“What’s most important, more to this, is to send a very strong signal to the whole community that we are very committed to returning the inflation path back to target,” he added.
The BSP started its tightening cycle in its May monetary-policy meeting, with a 25-basis-point hike in its main policy rate. This was followed by another 25-basis- point rate hike in June. In its latest meeting in August, the BSP delivered its most aggressive rate hike in a decade, increasing its main policy rate by 50 basis points.
All rate hikes were made with the goal of pulling the soaring inflation back to the 2-4 percent target range for 2019. In the first seven months of the year, inflation averaged at 4.5 percent.
“The economy can handle it. We have to make hard choices. We can make those hard choices,” Espenilla said. Amid the rate hikes, the local economy, on the other hand, slowed to 6 percent in the second quarter of the year as agriculture output dragged overall growth during the period.
“Sustained domestic growth suggests that the economy can accommodate monetary-policy tightening. This growth is broad-based, thereby providing more opportunities across all segments of society,” Espenilla said.
“Looking ahead, the BSP’s decisions on monetary policy will continue to be data-dependent and guided by our inflation forecasts,” he added.
What the BSP is waiting for
In terms of the specific data trajectory needed to firm up the BSP’s future monetary-policy decisions, Espenilla said they are looking to get more information in the fronts of inflation momentum, the level of second-round effects and the peso movement.
In particular, the BSP chief said they hope to see a continued loss in inflation momentum. Espenilla said while the actual number is still going up as of July, the momentum of inflation has actually started slowing down in month-on-month terms.
Latest inflation data show a 5.7-percent rise in the overall prices of consumer goods in July, compared to its year-ago levels.
The BSP hopes that data will show no further broadening of second-round effects and that the movement of the peso will be contained, as this feeds off inflation, particularly for imported goods such as petroleum.
Economists earlier said the BSP’s still hawkish stance amid the 100- basis-point rise not only addresses inflation but also keeps the local currency from falling further.
Déjà vu
While inflation has been tamed for years, Espenilla said the elevated inflation regime is not new to the country, as the economy has seen similar patterns in the past, particularly in 2008 when oil prices rose sharply, resulting in an 8.3-percent inflation rate before easing sharply to 4.2
percent in 2009.
The governor said the BSP then kept its policy rates on hold and “accommodated” first-round effects, but when supply side pressures persisted and seeped through second-round effects, the BSP delivered “timely” and “decisive” action by raising policy rates by a total of 100 basis points between May and August in 2008.
“We bring back history just to remind us that we have seen similar patterns in the past,” Espenilla said.
Inflation has since remained below 5 percent from 2009.
Image credits: Carlo Gabuco/Bloomberg