The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday raised the benchmark interest rate by 50 basis points to 4 percent in a bid to rein in inflation.
It was the largest adjustment in overnight borrowing rate in 10 years, and followed two successive 25-bps hikes early this year. The Monetary Board made the adjustment after inflation rate accelerated to a five-year high of 5.7 percent in July.
The increase in interest rate also came amid signs of decelerating economic growth. The Philippine Statistics Authority reported Thursday that the gross domestic product expanded 6 percent in the second quarter, slower than the 6.6-percent growth in the first quarter.
Bangko Sentral Governor Nestor Espenilla Jr. said the interest rates on the overnight lending and deposit facilities were also increased accordingly.
Data showed that the last time the Monetary Board raised the policy rate by 50 basis points was in July 2008, when inflation reached 12.2 percent amid the global financial crisis.
“In deciding to raise the BSP’s policy interest rate anew, the board noted that latest baseline forecasts have shifted over the policy horizon, indicating some risk of inflation exceeding the target in 2019,” Espenilla said.
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 to 4 percent for 2019.
Espenilla said the Monetary Board deemed it necessary to have stronger monetary action to rein in 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 Bangko Sentral 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. The forecast for 2019 was raised to 3.7 percent from 3.3 percent previously. The board also announced an inflation forecast of 3.2 percent for 2020.
Bangko Sentral Deputy Governor Diwa Guinigundo said the Monetary Board considered four factors in adjusting the inflation forecast for 2018. These were the increase in jeepney fares, the water rate increases, increase in excise taxes for tobacco and higher oil prices.
Espenilla expressed optimism that the rate hike on Thursday would prop up the peso.
He said the Monetary Board believed that the series of policy rate adjustments thus far in 2018 would help reduce further the risks to inflation, including those emanating from the ongoing normalization of monetary policy in advanced economies and its impact on the foreign exchange market, and bring inflation toward a target-consistent path over the medium term.
“Favorable conditions arising from sustained domestic growth also suggest that the economy can accommodate a further tightening of monetary policy settings,” Espenilla said.
He said the board reaffirmed its support for carefully coordinated efforts with other government agencies in implementing non-monetary measures to further mitigate the impact of supply-side factors on inflation.
“The BSP reiterates its strong commitment and readiness to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability,” he said.
ING Bank Manila senior economist Joey Cuyegkeng said the BSP delivered an aggressive policy response to anchor inflation expectations as it signalled last month. He said the move also supported the peso which contributed to rising inflation.
“The aggressive BSP policy tightening not only addresses BSP’s mandate to moderate inflation but also moderate the imbalance generated by private sector growth and enhanced government spending,” he said.
“We believe that this is not the end of BSP’s tightening as the immediate objective to anchor inflation expectations would need further action since inflation is yet to peak and would remain elevated for the rest of the year and early 2019,” Cuyegkeng said.