The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday raised the overnight borrowing rate by another 50 basis points to 4.5 percent amid the persistent threat of rising inflation.
Bangko Sentral Deputy Governor Chuchi Fonacier said in a news briefing the interest rates on the overnight lending and deposit facilities were also increased accordingly. The rate hike will be effective today.
“The Monetary Board recognized that a further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures,” Fonacier said. Fonacier is the officer in charge of the BSP as Governor Nestor Espenilla Jr. is on leave while Deputy Governor Diwa Guinigundo is in London as a part of the Philippine delegation’s visit to the United Kingdom this week.
The 50-basis-point hike on Thursday was the fourth upward adjustment this year, bringing the total rate hikes to 150 bps since May 2018. In May and June, the board raised the rates by 25 bps each, followed by 50 bps on Aug. 9, 2018.
The Monetary Board also raised the 2018 inflation forecast to 5.2 percent from an earlier estimate of 4.9 percent. The forecast for 2019 was also adjusted to 4.3 percent from 3.7 percent. Meanwhile, the forecast for 2020 was retained at 3.2 percent.
BSP assistant governor Francisco Dakila said the upward revision in 2018 inflation forecasts considered the higher-than-expected 6.4 percent inflation in August, a nine-year peak that brought the average inflation in the first eight months to 4.7 percent, above the official target range of 2 percent to 4 percent.
Another factor considered was the expected peak of inflation in the third quarter, as predicted by the Bangko Sentral and private sector economists.
Fonacier said latest baseline forecasts shifted higher for both 2018 and 2019, with risks to the outlook still leaning toward the upside.
“With supply-side forces expected to continue to drive inflation in the coming months, inflation expectations have remained elevated amid indications of second-round effects. Meanwhile, domestic demand conditions have generally held firm, even as the previous monetary policy responses continue to work their way through the economy,” Fonacier said.
She said the decision to raise the policy rate anew would anchor inflation expectations and safeguard the inflation target over the policy horizon.
Fonacier said the board believed that a tighter monetary policy stance would 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.
Dakila, however, said the planned tariffication of rice imports would result in slower inflation path in the coming months.
ING Bank said the BSP might not be done hiking interest rates and it might still be called to enact another round of rate hikes as inflation expectation remained elevated going into 2019.
“Thus it will be imperative for non-monetary policy measures to help alleviate price pressures as we approach the all-important Christmas season, a crucial turning point ahead of the mid-term election in May,” the bank said.
“Barring any additional calamities, both natural and man-made, we expect inflation to revert to within target towards the latter half of 2019. BSP’s forecast for 2019 inflation has been pegged at 4.3 percent and we expect inflation to fall within target by end-2019,” ING said.
The Asian Development Bank earlier cited higher inflation as one of the factors why it downgraded the growth forecast for the Philippines this year to 6.4 percent from an earlier estimate of 6.8 percent. Other factors cited were the expected slower agricultural output and global monetary tightening.
The ADB also reduced the growth forecast for 2019 to 6.7 percent from 6.9 percent. The revisions were contained in an update of its flagship annual economic publication Asian Development Outlook 2018.
The bank expects inflation to settle at 5 percent in 2018 and 4 percent in 2019, exceeding the government’s official target of 2 percent to 4 percent this year. ADB said rising global prices for oil and other commodities contributed to underlying inflationary pressures.
“Proposed reforms to replace quantitative restrictions on rice, with resulting tariff revenue to be invested to improve domestic rice farming, will help stabilize food prices over the medium-term,” according to the report.