The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, is expected to increase interest rates by another 25 basis points in its meeting this month amid lingering higher inflation expectations, the local unit of Dutch financial giant ING Bank said Tuesday.
ING Bank Manila senior economist Joey Cuyegkeng said in a report inflation rate would likely hit 6.1 percent in August, above the consensus of 5.9 percent earlier projected by most economists for the month.
“BSP is likely to act on its hawkish rhetoric this month on the back of a still elevated inflation report for August. BSP has signalled its readiness to act after the aggressive 50-bps hike at the last policy rate meeting [on Aug. 9],” Cuyegkeng said.
He said the August inflation could already be at its peak.
“Market expects inflation for August to rise to 5.9 percent from July’s 5.7 percent. The surveys show a range of 5.8 percent to 6.1 percent. BSP expects inflation to gravitate to 5.9 percent for August and to be within its forecast range of 5.5 percent to 6.2 percent,” he said.
“We are less optimistic and expect a 6.1 percent inflation rate for August,” he said.
Inflation in July accelerated to a more than five-year high of 5.7 percent from 5.2 percent in June. This brought average inflation in the first seven months to 4.5 percent, above the target range of 2 percent to 4 percent set by the government.
Cuyegkeng also said the weakness of the peso could be another factor for the Monetary Board to consider in tweaking the policy stance.
“An extended period of emerging markets risk-off sentiment would keep PHP under pressure… We expect a 25-bps BSP rate hike later this month and another 25-bps in the fourth quarter,” he said.
The government is set to release the August inflation data within this week.
The accelerating inflation rate compelled the Bangko Sentral to raise the benchmark interest rates on Aug. 9 by a rare 50 basis points to 4 percent in a bid to rein in inflation. The interest rates on the overnight lending and deposit facilities were also increased accordingly. The BSP earlier raised the policy rate by 25 bps each in May and June 2018.
The last time the Monetary Board raised the policy rate by 50 bps was July 2008, when inflation reached 12.2 percent amid the global financial crisis.
Bangko Sentral Governor Nestor Espenilla Jr. said that in deciding to raise the BSP’s policy interest rate, the board noted that latest baseline forecasts shifted over the policy horizon, indicating some risk of inflation exceeding the target in 2019.
He said upside risks also continued to dominate the inflation outlook, as the sustained increase in core inflation suggested broadening price pressures amid resilient aggregate demand conditions. Meanwhile, he said inflation expectations remained elevated, although staying within the target of 2 percent to 4 percent for 2019.
He said the board deemed it necessary to have the stronger monetary action to rein inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects, even as the previous monetary policy responses continued to work their way through the economy.
The board also adjusted upwards the inflation forecasts for 2018 and 2019. The forecast for this year was increased to 4.9 percent from the previous estimate of 4.5 percent.