The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Wednesday raised for the second time this year the benchmark overnight borrowing rate by 25 basis points to 3.5 percent to ward off possible second-round effects of inflation.
The interest rates on the overnight lending and deposit facilities were also increased accordingly.
“In deciding to raise policy interest rates, the Monetary Board noted that inflation expectations remained elevated for 2018 and that the risk of possible second-round effects from ongoing price pressures argued for follow-through monetary policy action,” Bangko Sentral Governor Nestor Espenilla Jr. said in a briefing following the policy meeting.
He said while inflation expectations remained within the target range for 2019, elevated expectations for 2018 highlighted the risk posed by sustained price pressures on future wage and price outcomes.
“Today we are announcing a 25-basis point hike based on the latest data… We will continue to monitor the data flow,” Espenilla said.
The rate hike was the second time this year, after the first 25-bps increase on May 10. Before that, the board had kept interest rates at a record low for four years..
Espenilla expressed confidence that the two rate hikes would be sufficient for inflation to return to the target range of 2 percent to 4 percent in 2019. He said the occurrence of inflation’s second-round effects “remain to be seen.”
Inflation in May accelerated to 4.6 percent from 4.5 percent in April, bringing the first five months’ average to 4.1 percent, slightly beyond the upper limit of the target range of 2 percent to 4 percent.
“Equally important, while latest baseline forecasts have shifted lower for 2018 to 2019, upside risks continue to dominate the inflation outlook,” he said.
Espenilla said the impact of international oil and commodity price movements on overall inflation was expected to be stronger, given the prevailing robust aggregate demand conditions.
The board reduced the inflation forecast this year to 4.5 percent from the estimate of 4.6 percent made during the May 10 meeting. The forecast for 2019 was cut to 3.3 percent from 3.4 percent.
Bangko Sentral Deputy Governor Diwa Guinigundo said the board took into account the possibility of the declining oil prices, and the assessment of the International Monetary Fund of the brighter outlook for the global economy.
Espenilla said further policy action would enable the Bangko Sentral to reinforce its signal on safeguarding macroeconomic stability in an environment of rising commodity prices and ongoing normalization of monetary policy in advanced economies.
“The Monetary Board also emphasized the BSP’s continued vigilance against developments, including peso volatility, that could affect the outlook for inflation. The BSP is prepared to take further policy action as needed to achieve its price and financial stability objectives,” Espenilla said.
The peso on Wednesday closed four centavos weaker at 53.48 against the US dollar, compared to 53.44 on Tuesday. This was a 12-year low against the greenback since it settled at 53.55 on June 29, 2006.
Espenilla earlier said monetary authorities were prepared to prevent the further volatility of the peso.