Another interest rate hike ordered
2018 inflation forecast raised to 5.3%; 2019, 2020 projections revised by Monetary Board
MONETARY authorities raised key interest rates for a fifth time this year on Thursday, noting still-elevated inflation risks and bucking analysts’ expectations of a pause given a third quarter growth slowdown.
The 25-basis point (bps) adjustment brought the Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing, lending and deposit rates to 4.75 percent, 5.25 percent and 4.25 percent, respectively, and the central bank’s policymaking Monetary Board also raised its inflation forecast for 2018 to 5.3 percent from 5.2 percent.
The 2019 projection was lowered to 3.5 percent from 4.3 percent but that for 2020 was raised to 3.3 percent from 3.2 percent. Both fall within the 2.0-4.0 percent target that is certain to be breached this year.
“While the latest inflation forecasts show inflation settling within the target band … in both 2019 and 2020, after considering the impact of non-monetary measures, including the rice tariffication bill and the suspension of the oil excise tax, the Monetary Board decided to raise the policy rate by 25 basis points given the upside risks to the inflation outlook and given that inflation expectations have remained elevated as supply-side and possible wage pressures continue to drive price developments,” central bank officer-in-charge Maria Almasara Cyd Tuaño-Amador said in a press briefing.
A generally favorable domestic economy could “allow some scope for a measured adjustment in the policy rate to rein in inflation expectations and pre-empt further second-round effects,” she added.
Tuaño-Amador said monetary authorities also “deemed it necessary to respond with proactive policy action to help temper the risks to the inflation outlook, including those emanating from the continued uncertainty in the external environment amid tighter global financial conditions and trade tensions among major economies.”
She emphasized the need for follow-through non-monetary measures to mitigate the impact of supply-side factors on inflation even as the “BSP remains prepared to take appropriate policy actions as needed to ensure the achievement of its price and financial stability objectives.”
The revised 2018 inflation forecast, BSP Department of Economic Research Director Dennis Lapid explained, “incorporates the rice tariffication bill as well as the announced suspension of the [additional] excise tax on oil [next year].”
In a comment, Capital Economics Asia economist Alex Holmes said the latest rate hike could mark the end of a tightening cycle. Future decisions, he added, will primarily depend on what happens to inflation in the next few months.
Headline inflation was unchanged at a nine-year high of 6.7 percent in October, Holmes noted, but the year-on-year rate should start to fall steadily over the coming months on the back of moderating food prices and declines in global oil prices.
“If we are right, then we think today’s (yesterday’s) hike will be the last in the current cycle. The BSP will also be concerned about pressing the brakes too hard given the worsening outlook for economic growth,” he said.
The Philippine economy slowed to a three-year low of 6.1 percent in the third quarter, bringing the year-to-date expansion to 6.3 percent or below the government’s target of 6.5-6.9 percent.