BSP raises rates to contain inflation

Published May 10, 2018, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) yesterday raised its  benchmark overnight rates higher by 25 basis points for the first time in four years to dispel second-round inflation fears and plug market speculations which could worsen overtime.

BSP Governor Nestor A. Espenilla Jr. said the Monetary Board raised the overnight reverse repurchase rate to 3.25 percent to “help arrest potential second-round effects by tempering the buildup in inflation expectations.” All other rates on overnight lending and deposit facilities were also adjusted.

Espenilla reiterated that forecasts “have further shifted higher” and that inflation pressures could become more broad-based over the policy horizon. “While inflation momentum has started to slow down, inflation may still breach the inflation target range (of two percent to four percent) for 2018 due primarily to temporary supply-side factors.”

BSP Deputy Governor Diwa C. Guinigundo said for this year, they now see inflation rising to 4.6 percent (2012 base year) from a previous forecast of 3.9 percent, mainly due to higher oil and rice prices. The latest forecast breached the two percent to four percent BSP target. For 2019, the target holds and they estimate an inflation average of 3.4 percent. This is higher than previous forecast of three percent.

“One of the points that the Monetary Board considered (for the higher forecasts) was the impact of the expected gain in domestic economic activity,” said Guinigundo. In the first quarter this year, GDP grew by 6.8 percent.

Guinigundo also said they expect crude oil prices to remain elevated for the year. He noted that the inflation outlook’s upside risks continue to come from possible increases in transport fares, wages and electricity rates.

Both officials said the BSP is closely monitoring all possible price pressures that could threaten their forecasts, particularly for 2019.

“There are several things the BSP is looking at (such as) risk areas that can affect our forecast such as oil,” said Espenilla.

But, he remains confident that the economy is strong and as it is now, inflation pressures are still on the supply side and these are temporary. He added that the market and economic environment have strong demand but there are transitory supply shocks that can feed into it.

“The Monetary Board observed that strong domestic demand allows some scope for a measured adjustment in the policy rate without adversely affecting the country’s economic growth momentum,” said Espenilla.

Inflation rate in April climbed to 4.5 percent, it has been rising since January. The year-to-date average stood at 4.1 percent, surpassing the full-year target range.

Global oil prices went up during the period due to geopolitical tensions in the Middle East which resulted to a sharp increase in international oil prices and affected prices of petroleum in the country. The higher electricity rates and rice prices also contributed to the increase in inflation rate.

The last time BSP rates were adjusted higher was in September, 2014.