‘Aggressive’ BSP rate hike seen

Market expectations that the central bank will implement an aggressive interest rate hike later this week—possibly by as much as 50 basis points—received a big boost on Monday after the government announced that the increase in consumer prices for July accelerated to yet another five-year high.

In a statement to reporters, Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said that last month’s inflation rate of 5.7 percent—near the top end of the central bank’s 5.1-5.8 percent forecast—would weigh heavily on the policy-making Monetary Board when it convenes on Thursday.

“We will consider all the latest data updates in determining the strength of our follow-through response in the upcoming policy meeting,” he said.

“The July 2018 actual inflation is at the high end of our July forecast but remains consistent with our expectation of elevated inflation prevailing in 2018 that will return to the target range by 2019,” Espenilla added.

According to the National Economic and Development Authority, the faster July inflation was caused mainly by higher food and transport costs. It also represents the seventh consecutive month of rising prices in the local economy, caused primarily by higher international crude oil prices, local rice supply bottlenecks and the aggravating effects of the Duterte administration’s tax increases this year.

Espenilla had earlier promised that the central bank would implement a “strong” response to the stubbornly high inflation rate regime.

After insisting that the inflation rate was driven by supply side factors that do not respond to monetary policy-tightening —and saying that prices would stabilize by 2019 without the need for intervention—the BSP finally decided to raise interest rates in two successive 25-basis point adjustments in May and June.

In finally deciding to tighten monetary policy, the central bank said it now saw evidence of inflation being driven by “demand side” pressure, which required higher interest rates to quell.

The BSP chief also announced a temporary halt to his policy of reducing banks’ statutory reserve requirements after two 100-basis point reductions this year, saying the drive to reduce bank reserves to single-digit levels from their current 18-percent rate would resume once inflationary pressure are contained next year.

The central bank had earlier set an inflation rate target of 2-4 percent for this year and next, but has already conceded that the 2018 goal would not be met. Its economists believe, however, that prices would stabilize next year and return the inflation rate to within the central bank’s targets.

“I reiterate the BSP’s firm commitment to meet the inflation target of 2-4 percent,” he said on Monday.