BSP raises key interest rates

After standing its ground despite rising inflation since the start of the year, the Bangko Sentral ng Pilipinas finally raised its key interest rates yesterday, saying that prices of goods and services might continue rising beyond its original forecasts for this year and next.

In a briefing, BSP Governor Nestor Espenilla Jr. said the policy making Monetary Board decided to increase its overnight rate by 25 basis point to 3.25 percent—its first hike since September 2014.

More importantly, the central bank hinted that its finger was on the trigger, ready to fire off another rate hike “as necessary to ensure the achievement of its price and financial stability objectives.”

“In deciding to raise the policy interest rate, the Monetary Board noted that latest forecasts had further shifted higher, indicating that inflation pressures could become more broad based over the policy horizon,” Espenilla said.

He added that while inflation momentum had “started to slow down,” inflation might still breach the target range, plus or minus 1 percentage point for 2018 due primarily to “temporary” supply side factors.

The central bank chief maintained, however, that the inflation scenario would normalize to within the target range by next year.

“The Monetary Board assessed that the balance of risks to the inflation outlook continues to lean toward the upside, with price pressures emanating from possible adjustments in transport fares, utility rates and wages,” he added.

In the meantime, BSP Deputy Governor Diwa Guinigundo announced yesterday that fresh data forced the central bank to adjust its inflation forecast for this year upward to 4.6 percent from the original 3.9 percent. Similarly, the inflation forecast for 2019—when prices are assumed to have stabilized—was moved upward from the original 3 percent to 3.4 percent.

According to Espenilla, these considerations made the Monetary Board believe that a rate hike will help arrest potential second-round effects by tempering the buildup in inflation expectations.

He noted that the rate hike —which usually prompts banks to adjust their lending rates and make it more expensive for retail and corporate borrowers—would not dampen economic growth because of strong domestic demand.

“In assessing the stance of monetary policy, the Monetary Board also emphasizes that it continues to closely monitor domestic macroeconomic conditions as well as the evolving global economic environment,” and including the potential impact of the ongoing round of monetary policy tightening in advanced economies, Espenilla said.