Business Monitor International, a unit of Fitch Group, said it expects the Bangko Sentral ng Pilipinas to increase its policy interest rate by another 25 basis points to 3.75 percent before the end of the year to control inflationary pressures.
The Monetary Board, the policy-making body of the BSP, on Wednesday raised its benchmark interest rate by 25 basis points to 3.5 percent, the second time this year. The corresponding overnight lending and deposit facilities were also raised by the same amount to 4 percent and 3 percent, respectively.
“The move to hike interest rates by a cumulative 50 bps over May and June was largely in line with our expectations and came at a time when global monetary conditions are tightening, while domestic inflationary pressures continue to mount,” BMI said in a report over the weekend.
It said that as the BSP struck a relatively hawkish tone when it said that it was prepared to take further policy action as needed to achieve its price and financial stability objectives, “we have revised our forecast for the central bank to tighten its policy rate by a further 25 bps to 3.75 percent before end-2018.”
BMI said inflation in the Philippines had been on a firm uptrend since December 2017, rising to 4.6 percent in May, the highest rate since November 2011.
It said while part of the inflation was caused by the tax reform program which pushed up the prices of basic goods and fuel through the imposition of excise taxes, other key contributing factors were rising global oil prices and higher aggregate demand.
“We have pointed out previously that the upward price pressure was more than just due to cyclical factors, but has been in part driven by high credit growth [18.4 percent y-o-y] as a result of the BSP’s
accommodative monetary policy stance,” it said.
“We have revised up our forecast for headline inflation to average 4.5 percent in 2018, from 4 percent previously, but note that this is contingent upon the BSP continuing its rate hiking cycle,” BMI said.
Bangko Sentral Governor Nestor Espenilla Jr. said that 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.
He said although 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.
The rate hike on Wednesday was the second time this year after the first 25-bps increase on May 10, 2018. Before that, the last time the board tweaked the policy stance was September 2014.
Espenilla expressed confidence that the two rate hikes might be sufficient for inflation to return to the target range of 2 percent to 4 percent in 2019.
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.
