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Monetary Board hikes rates anew

Adjustment higher at 50bps; inflation forecasts also raised

MONETARY authorities on Thursday raised key interest rates for a third time this year, and by a much higher 50 basis points, given increased inflation risks following yet another five-year high in July.

The decision by the Monetary Board (MB), the Bangko Sentral ng Pilipinas’ (BSP) policy-setting body, brought the central bank’s overnight borrowing, lending and deposit rates to 4 percent, 4.50 percent and 3.50 percent, respectively.

The MB also raised its raised its inflation forecasts for 2018 and 2019 to 4.9 percent and 3.7 percent, respectively, from 4.5 percent and 3.3 percent previously, and also issue a 3.2 percent inflation forecast for 2020.


The rate hike followed a cumulative 50bps over May and June. The last time the monetary authorities increased interest rate by 50bps was in July 2018, when inflation hit 12.2 percent.

“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,” central bank Governor Nestor Espenilla Jr. said.

Consumer price growth accelerated to 5.7 percent last month, just under the upper end of the BSP’s forecast range, from June’s 5.2 percent. The rise, which brought year-to-date inflation to 4.5 percent, was traced to higher food and transport costs.

“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.

Nevertheless, the BSP chief assured that inflation was still likely to stay within the 2.0-4.0 percent target next year, even if expectations remain elevated.

“[T]he Monetary Board deemed stronger monetary action to be 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 said.

Espenilla also said that rate hikes so far this year “will help reduce further the risks to inflation,” which includes the impact of normalization of monetary policy in advanced economies on foreign exchange market, “and bring inflation toward a target-consistent path over the medium term.”

Further policy tightening can be accommodated, he noted, given favorable conditions arising from sustained domestic growth.

“The Monetary Board…reaffirmed its support for carefully coordinated efforts with other government agencies in implementing non-monetary measures to further mitigate the impact of supply-side factors on inflation,” Espenilla said.

He emphasized that the central bank was committed and ready to implement policy actions “to address the threat of high inflation and deliver on its primary mandate of price stability.”

Central bank Deputy Governor Diwa Guinigundo, meanwhile, explained that the MB considered a jeepney fare hike, higher water rates, increased in tobacco excise tax, and positive base effects of higher Dubai crude oil price in deciding to revise its forecast for this year.

“For 2019 forecast, the first reason is decline in world non-oil import price growth. The second is negative base effects of supply shocks of oil, food and excise tax,” he said.

Commenting on the rate hike, analysts from London-based research consultancy firm Capital Economics and ING Bank Manila offered differing views on possible future monetary policy decisions.

“In the press conference, the central bank reiterated that it is prepared to take strong measures to tackle inflation, which suggests that further hikes are likely,” Capital Economics senior Asia economist Gareth Leather observed.

However, he added that “there are reasons to think the BSP is approaching the end of its tightening cycle” if inflation peaks soon as expected.

Leather said headline inflation should start to ease from October as upward pressure from high oil prices would start easing soon.

For ING Bank Manila senior economist Joey Cuyegkeng, the aggressive policy tightening not only addressed the Bangko Sentral’s mandate to moderate inflation but also moderated the imbalance generated by private sector growth and enhanced government spending.

“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,” he said.

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