BSP says ‘only a question of time’ before it hikes rates to fight inflation

Amid criticism that it failed to act preemptively to keep price hikes in check, the Bangko Sentral ng Pilipinas on Tuesday gave the strongest indication yet that it is ready to increase its key interest rate in a bid to rein in inflation which currently stands at its highest level in three years.

At the same time, BSP Governor Nestor Espenilla Jr. pointed out that it has, in fact, already been implementing a de facto tightening of monetary policy by allowing yields at of its main anti-inflation tools to rise every week.

In an interview, the central bank chief said that yields for the BSP’s term deposit facility — a scheme used for taking idle funds out of circulation by enticing financial institutions to deposit them with the regulator — have been rising steadily since mid-February.

“The longer-dated [interest rates] rates have already moved up,” he said in an interview in Makati City on Tuesday. “The overnight rate hasn’t adjusted yet. But it’s just a question of time.”

The BSP’s policy making Monetary Board will convene on May 10 to decide whether or not to raise interest rates after disappointing market watchers during their last two meetings in February and March by opting to keep them unchanged.

Espenilla said that while the term deposit facility, in which banks can deposit their unused cash for 7, 14 or 28 days, is not a proxy for the closely followed overnight rates, it is one of the instruments available to the BSP in its arsenal.

“And we have allowed interest rates to move up in line with market condition,” he said, noting that average yields on the three instruments have risen by about 50 basis points in recent weeks.

Similarly, he pointed out that the yield on the government’s benchmark 91-day Treasury bill has risen by over 100 basis points since the start of the year.

“At the end of the day, we want to influence economic activity, expectations and the exchange rate,” Espenilla said, parrying criticism about the central bank’s supposed inaction on inflation. “And all of these are susceptible to the movement of interest rates by different magnitudes.”

In a separate speech delivered to the American Chamber of Commerce of the Philippines on Tuesday, the BSP chief acknowledged that rising prices represent “clouds on the horizon” that require economic managers to be “especially vigilant.”

In particular, Espenilla said the challenges revolve around dealing with inflation and potential overheating of the economy.

“Our latest readings do show that the risks to inflation remain weighted toward the upside,” he said, while noting that inflation expectations among the general public have started to rise.

“These could contribute to potential second-round price effects,” he admitted. “Nevertheless, non-monetary measures such as targeted subsidies are expected to mitigate these second round inflationary pressures. We shall see. And we shall act accordingly.” /je