BSP raises key rates anew by 25 bps

Published June 20, 2018, 12:00 AM

by manilabulletin_admin

By Lee Chipongian 

The Bangko Sentral ng Pilipinas (BSP) Wednesday raised its key rates for the second time in a row to keep inflation path where they want it to be and to check the exchange rate volatility.

BSP Governor Nestor A. Espenilla Jr., chair of the seven-man Monetary Board, said they are “prepared to take further policy action as needed” to protect the inflation outlook.

 

A logo of the Bangko Sentral ng Pilipinas is seen at their headquarters in Manila, (REUTERS/Romeo Ranoco / MANILA BULLETIN)
A logo of the Bangko Sentral ng Pilipinas is seen at their headquarters in Manila, (REUTERS/Romeo Ranoco / MANILA BULLETIN)

A logo of the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) is seen at their headquarters in Manila

With another 25 basis points added, the overnight borrowing rate is now 3.5 percent – a second rate increase from its May 10 policy meeting. The BSP again readjusted its inflation forecasts lower for both 2018 and 2019. It now estimates 4.5 percent inflation average for this year from its May 10 forecast of 4.6 percent, while for 2019, the forecast is 3.3 percent, also lower than its previous’ 3.4 percent.

In May, the inflation rate was at 4.6 percent – a slower increase than expected – but still breaching the 2018 target of two-four percent. It was also a five-year high.

Espenilla said adjusting the rates a second time will help manage inflation better as they see continued “elevated expectations”. They are also closely watching the peso volatility since its movement adds to the inflation dynamics, he said.

After issuing the Monetary Board statement, however, he said that if inflation rises more, this will have to be met with a stronger response before it could “spiral out of control”.

Espenilla also said that they had to adjust rates in two consecutive meetings because the “risk of possible second-round effects from ongoing price pressures argued for follow-through monetary policy action.”

“Although inflation expectations remain within the target range for 2019, elevated expectations for 2018 highlight the risk posed by sustained price pressures on future wage and price outcomes,” he said. “Equally important, while latest baseline forecasts have shifted lower for 2018-2019, upside risks continue to dominate the inflation outlook, even as various measures of core inflation continue to rise. Moreover, the impact of international oil and commodity price movements on overall inflation is expected to be stronger given prevailing robust aggregate demand conditions.”

Espenilla said a second rate increase “enables the BSP to reinforce its signal on safeguarding macroeconomic stability in an environment of rising commodity prices and ongoing normalization of monetary policy in advanced economies.”

Inflation is running at a five-year high and the peso, the region’s worst performer, has lost more than 6 percent against the dollar this year, in part because some analysts say BSP was slow in raising rates after price growth already accelerated. A swelling trade deficit is also dragging down the peso and spurring a sell-off in the nation’s stock market.

Espenilla reiterated the Philippines isn’t behind the curve on policy tightening, and said the central bank has a track record of meeting its price targets in the past. Missing the top-end of the goal this year is a one off, he said, adding “the BSP has shown that it has both the will and the ability to raise policy rates whenever it is necessary.”

“While the peso is generally market-determined, we’re also looking at the monetary policy side,” Espenilla said in the interview. During the forum, he said the BSP “is ready to act to prevent excessive peso volatility and overshooting due to speculative activities.”

 
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