By Melissa Luz T. Lopez
THE BANGKO SENTRAL ng Pilipinas (BSP) fired off another strong policy action yesterday, bringing interest rates to a nine-year high as the central bank sought to temper surging prices and lend support to the peso.
The Monetary Board raised policy rates by another 50 basis points (bp) on Thursday, marking the fourth consecutive tightening move this year as policy makers seek to rein in expectations.
This matched the central bank’s tightening move last month, and brings benchmark rates to five percent for overnight lending and to four percent for overnight deposit.
The (overnight reverse repurchase) key policy rate is now at 4.5%, the highest since March 2009.
“The Monetary Board recognized that further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures,” BSP officer-in-charge Deputy Governor Chuchi G. Fonacier said in a press briefing on Thursday.
“Latest baseline forecasts have shifted higher for both 2018 and 2019, with risks to the outlook still leaning toward the upside.”
This likewise carries out BSP Governor Nestor A. Espenilla, Jr.’s earlier signal of a “strong monetary action” following a 6.4% inflation rate in August that was the fastest pace in nine years amid food supply issues and rising global oil prices.
Mr. Espenilla is currently on medical leave until Oct. 2.
A BusinessWorld poll showed that markets have priced in another tightening move by the BSP, with 15 out of 16 economists expecting a 50bp hike this week.
“The Monetary Board believed that a tighter monetary policy stance will help steer inflation toward a target-consistent path over the medium term by reducing further risks to the inflation outlook, including those emanating from exchange rate volatility given the continued uncertainty in the external environment amid geopolitical tensions and the normalization of monetary policy in advanced economies,” Ms. Fonacier added.
Thursday also saw the United States Federal Reserve raise rates by another 25bp, as expected.
Assistant Governor Francisco G. Dakila, Jr. said the Fed’s latest move was “already incorporated” in the BSP’s decision.
“The impact of a successive 50bp increase in the policy rate is greater than… a single 50bp increase because that shows that there is a commitment of the BSP to address the inflation pressures that may be coming from current developments,” Mr. Dakila said.
He added that the rate hike “should help” the peso strengthen against the dollar, which has been trading at fresh 12-year lows, weaker than the P54-to-$1 mark.
Benchmark rates have now risen by a cumulative 150bp so far this year.
Prior to Thursday’s hike, bank lending rates have climbed by 84.2bps from when the central bank kicked off its current tightening round in May.
The central bank on Thursday also bumped up its inflation forecasts anew and now sees 2019 inflation also at risk of clocking in beyond the 2-4% target range.
Mr. Dakila said inflation will average 5.2% this year, higher than the 4.9% estimate given last month. Inflation averaged 4.8% in the eight months to August, well above the 2-4% target band for 2018.
Next year, inflation could log 4.3%, also higher than the 3.7% previous estimate. By 2020, inflation is seen at 3.2%.
The higher forecasts follow in the wake of August’s faster-than-expected pace, surging prices of rice and other farm products, as well as higher global oil prices.
“If rice tariffication pushes through in 2019, that could push inflation rate back to within target range,” Mr. Dakila said, referring to the measure that applies a regular tariff scheme on the staple from the current import quota scheme.
He added that the measure can reduce headline inflation by 0.7 percentage point should it take effect at the start of next year.
The BSP still expects inflation to have peaked this quarter, while supply shocks due to the recent typhoon should be limited “to just a few months.”
Central bank officials have said that price pressures are supply-driven, hence, better addressed by non-monetary measures.
At the same time, economic growth can be expected to remain “respectable” and “above trend” despite rising interest rates, BSP Deputy Governor Ma. Almasara Cyd N. Tuaño-Amador said.
Economists said inflation could have clocked a new record this month as food prices likely soared as the typhoon Mangkhut — locally called Ompong — caused damage worth at least P26 billion in farms and nearly P7 billion in infrastructure, according to latest estimates made by the National Disaster Risk Reduction and Management Council. Heavy rains ruined crops in Benguet, Isabela and Cagayan which are among the country’s major sources of vegetables.
Malacañang has also issued four administrative orders directing the National Food Authority, the Sugar Regulatory Administration and the Department of Agriculture to lift non-tariff barriers and streamline import procedures for rice, sugar, meat and fish, in line with recommendations outlined by President Rodrigo R. Duterte’s economic managers.
Market economists said yesterday’s hike sought to temper price pressures.
However, ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng said the BSP may still “enact another round of rate hikes” as inflation expectations remain elevated.
Noting the BSP’s signals on Thursday were “decisively hawkish”, Nomura analyst Euben C. Paracuelles said in a note: “Overall, we continue to see risks that will BSP will hike again this year given its clear hawkish signals and its forecast that inflation could remain above target again next year.”