Decisive monetary action set – BSP chief

Published September 5, 2018, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

MB file photo.
MB file photo.



With August inflation of 6.4 percent surging past its estimates, Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said containing elevated rates back to target has reached a new level of urgency.

“It is most critical at this point to restore inflation back to the target range soonest and securely anchor inflationary expectations,” Espenilla said. The BSP’s inflation target remains at two-four percent, he added, which is a two-year ahead inflation forecast as part of its regular policy review.

Espenilla called August’s 6.4 percent nine-year high – which is way past its single rate 5.9 percent forecast for the month — an “unfortunate confluence of cost-push factors,” that he said continue “to drive consumer price inflation in August beyond the acceptable target range.”

“Much of it has to do with food supply shocks. Rice in particular,” Espenilla said. “These warrant more decisive non-monetary measures to fully address.” Government programs such as targeted cash transfers and subsidies to public transport drivers are some of these non-monetary measures.

The BSP in a statement yesterday said the higher-than-expected inflation result is an impact of supply-side factors due to recent weather disturbances and the “continued uncertainty in rice supply (and also) energy and transport prices have contributed to the uptick in inflation.”

“The BSP continues to monitor with increased vigilance the evolving outlook for inflation, along with the public’s inflation expectations as well as further evidence of second-round effects, all of which shall be considered closely in the assessment of the monetary policy stance at the September 2018 Monetary Board policy meeting,” the BSP said. “The BSP reaffirms 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. (We) also support the implementation of government coordinated non-monetary measures to address the supply-side nature of current inflation pressures.”

The BSP had an August inflation forecast range of 5.5 percent to 6.2 percent but had expected the actual rate to settle at 5.9 percent, higher than July’s 5.7 percent. Espenilla said the elevated oil prices have continued to impact transport and power prices. “At the same time, the peso (along with other currencies) is being adversely affected by emerging market uncertainties and a strong US dollar. These are adding to the cost-push pressures.”
“However, it is equally apparent that strong domestic demand,” he added, “is making it too convenient for producers and traders to pass on higher costs and possibly more to consumers.”

The BSP is holding its sixth Monetary Board policy meeting for the year this month, on September 27. Espenilla said they will be looking more closely at the latest data to reassess the medium-term inflation path.

During its August 9 policy stance meeting, the BSP raised its 2018 inflation forecast from 4.5 percent to 4.9 percent and its 2019 forecast to 3.7 percent from 3.3 percent. For 2020, it had a 3.2 percent inflation estimate. Both the 2019 and 2020 inflation are the rates the BSP is trying to protect now and to keep it within the two-four percent target.

Espenilla said they will evaluate and assess “appropriate recommendations” for its September 27 meeting. “We also need to consider external developments and US Fed actions to the extent these exert undue pressure on the peso,” he emphasized. “Under the circumstances, we will weigh the need for further monetary policy action.”

Espenilla has said that the BSP is keeping its “door open to take further policy action” and maintaining a “strong follow-through” option after raising rates three times in a row for a cumulative increase of 100 basis points to contain inflation expectation and to protect the 2019 inflation path.

The BSP has often repeated that inflation will peak in the third quarter – either in August or September — before slowing down. Espenilla said that even after the inflation has reached its peak for the year and has started to decelerate, the data-driven central bank would “have to see more numbers” to pin down the next months’ inflation path.

The BSP first raised benchmark rates by 25bps in May to curb an inflation rise, and another 25bps in June. The most recent aggressive response was 50bps last month to rein in inflation expectation which has been disanchored, and to temper second round effects.

ING Bank senior economist Joey Cuyegkeng in a commentary yesterday said the BSP would have to continue with its aggressive monetary response to contain inflation expectations.

“Inflation expectations remain on an uptrend and increases demand pull pressures as consumers and businesses anticipate elevated prices. The central bank needs to contain run-away inflation expectations and demand pull pressures,” Cuyegkeng said. “The chances of another aggressive monetary policy action has zoomed as inflation surged. Another 50bps policy rate hike at the September 27 meeting is a real possibility.”

Cuyegkeng noted that inflation in August has exceeded forecasts including that from the central bank. “We expect inflation to remain elevated for the rest of the year with next month’s inflation rate likely to remain above six percent and full year average inflation at 5.1 percent, significantly higher than the inflation target.”

Cuyegkeng added that efforts of government to address supply issues should eventually moderate price pressures, but that “the impact of second-round effects would still have to be reflected in production costs and retail prices (while) minimum wage increases for the capital region has yet to be announced while transport groups seek another 10-15 percent increase in minimum fares on top of the recent increase.”