The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday raised the benchmark borrowing rate for the first time in four years by 25 basis points to 3.25 percent in a bid to arrest any potential second-round effects of rising inflation.
Bangko Sentral Governor Nestor Espenilla Jr. said the interest rates on overnight lending and deposit facilities were also increased by 25 bps, or to 3.75 percent from 3.5 percent, and 2.75 percent from 2.5 percent, respectively.
“The decision is based on the latest developments… the time to act is now. By acting right now, we will avoid a very strong action down the road,” Espenilla said in a news briefing following the Monetary Board meeting.
Espenilla said in deciding to raise the policy interest rate, the board noted that the latest inflation forecasts had shifted higher, an indication that price pressures could become more broad-based over the policy horizon.
Thursday’s move by the board confirmed economists’ previous forecasts that the Bangko Sentral would tweak the policy stance to temper the accelerating inflation.
Inflation rate accelerated to a more than five-year high of 4.5 percent in April from 4.3 percent in March, based on the new 2012 index, on the back of faster price increases of alcoholic beverages and tobacco or the so-called ‘sin products.’
Data showed the April inflation was faster than 3.2 percent in the same month last year. The figure brought the average inflation in the first four months to 4.1 percent, breaching the upper limit of the government’s target range of 2 percent to 4 percent for the whole year.
The Monetary Board also raised the inflation forecast for 2018 to 4.6 percent from the 3.9 percent estimate made in the March 22 meeting. The forecast for 2019 was also increased to 3.4 percent from 3 percent.
Bangko Sentral Deputy Governor Diwa Guinigundo said that in raising the inflation forecast for 2018, the board considered the impact of domestic developments, especially the first-quarter gross domestic product growth of 6.8 percent.
Guinigundo said other factors considered by the board were the expected increases in oil prices and higher wages in October 2018.
Espenilla said the “BSP stands ready to undertake further policy action as necessary to ensure the achievement of its price and financial stability objectives.” However, he did not provide hints on whether the monetary tightening would continue in the next MB meetings.
“It is too soon to make such statements and in what magnitude. We evaluate all the information and we are guided by data… The GDP in the first quarter grew strongly in an environment where demand is strong. We are watching all these things,” he said.
The last time the Monetary Board tweaked the policy stance was in September 2014.
Espenilla said a timely increase in the BSP’s policy interest rate would help arrest potential second-round effects by tempering the buildup in inflation expectations.
“The board observed that strong domestic demand allows some scope for a measured adjustment in the policy rate without adversely affecting the country’s economic growth momentum,” Espenilla said.
“In assessing the stance of monetary policy, the Monetary Board also emphasizes that it continues to closely monitor domestic macroeconomic conditions as well as the evolving global economic environment, including the potential impact of the ongoing normalization of monetary policy in some advanced economies,” he said.