BSP hikes rates to stump inflation threat

The central bank yesterday sought to drive a final nail in the coffin of the inflation crisis that has plagued the Philippine economy for the better part of 2018, by ordering a modest interest rate hike that was seen by market watchers as insurance against a possible resurgence in price increases.

In a press briefing, Bangko Sentral ng Pilipinas Deputy Governor Cyd Tuaño-Amador said the Monetary Board had decided to raise the interest rate on the overnight reverse repurchase facility by 25 basis points to 4.75 percent, effective Friday, Nov. 16.

The interest rates on the overnight lending and deposit facilities were raised accordingly.

This brings the cumulative central bank rate hikes to 175 basis points over five consecutive Monetary Board policy meetings since May—a series of moves described by some economists as a belated response to the inflation crisis, which regulators initially said would resolve itself by year-end without the need for intervention.

Despite latest data showing a plateauing month-on-month inflation rate, the central bank decided not to take any chances.

“While the latest inflation forecasts show inflation settling within the target band of 3 percent, plus or minus 1 percentage point in both 2019 and 2020, after considering the impact of nonmonetary 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,” Tuaño-Amador said.

However, the BSP officer in charge, sitting in for Governor Nestor Espenilla Jr. who has resumed his medical leave, said the Monetary Board believed prospects for the domestic economy remained generally favorable and allowed some scope for a measured adjustment in the policy rate to rein in inflation expectations and preempt further second-round effects.

“The Monetary Board 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 said.

Nevertheless, the seven-man policymaking body continued to emphasize the need for follow-through nonmonetary measures to mitigate the impact of supply-side factors on inflation.

“The BSP remains prepared to take appropriate policy actions as needed to ensure the achievement of its price and financial stability objectives,” she said.