The Bangko Sentral ng Pilipinas once more defended its decision to hold off on interest rate hikes early this year, which its critics have blamed for aggravating the country’s stubbornly high inflation rate this year.
In a speech delivered before the Institute of Corporate Directors on Tuesday morning, BSP Governor Nestor Espenilla Jr. said preliminary data indicated that prices of goods and services were being driven by so-called supply side factors against which a tightening of monetary policy would be ineffective.
The central bank chief said, however, that “material changes towards the end of the first quarter and the beginning of second quarter of 2018” finally prompted the Monetary Board to raise its key overnight borrowing rate by two successive 25-basis point hikes in May and June.
By this time, the country’s inflation rate was already at its highest for at least five years.
“On the global front, the attractiveness of the US economy was highlighted by both its fiscal and monetary policy adjustments, including rising interest rates,” Espenilla said, “This caused a migration of portfolio investments seen in the decline in Asean 5 equities markets leading to increased market volatility.”
This phenomenon contributed to more pressure on the local currency, while the continued rise in global oil prices and the price effect brought on by scarcity of rice from the National Food Authority “provided key impetus for higher levels of inflation,” he explained.
“Our two successive rate hikes in May and June were measured and deliberate responses to the evolving economic environment and dynamic market conditions meant to help anchor inflation expectations and temper second-round effects, firmly signaling our commitment to ensuring price stability,” he said.
The BSP’s overnight borrowing rate, on which all banks base their commercial loan rates, currently stands at 3.5 percent. The inflation rate for June stands at 5.2 percent, which is the highest in at least five years. Central bank economists expect the price hikes to peak in October of this year, and return to normal by next year.