The Bangko Sentral ng Pilipinas delivered its strongest monetary response in 10 years to combat the rising inflation rate and the peso depreciation.
The Monetary Board, the policy-making body of the BSP, raised by a rare 50 basis points the overnight borrowing rate to 4 percent on Aug. 9, after inflation rate accelerated to a five-year high of 5.7 percent in July.
The interest rates on the overnight lending and deposit facilities were also raised accordingly.
The Monetary Board said it deemed stronger monetary action was necessary to rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects, even as the previous monetary policy responses continue to work their way through the economy.
The Monetary Board’s 50-bps hike was the third adjustment this year, following the 25-bps increase in May and another 25-bps hike in June. Overall, the board increased by 100 basis points the policy interest rates this year.
“The Monetary Board believed that the series of policy rate adjustments thus far in 2018 will help reduce further the risks to inflation, including those emanating from the ongoing normalization of monetary policy in advanced economies and its impact on the foreign exchange market, and bring inflation toward a target-consistent path over the medium term. Favorable conditions arising from sustained domestic growth also suggest that the economy can accommodate a further tightening of monetary policy settings,” the BSP said in a statement.
It was the first time in 10 years that the BSP increased the policy rate by 50 basis points, since it delivered a 50-bps hike on July 17, 2008 after inflation reached 12.2 percent during the global financial crisis.
The Monetary Board decided that the 50-bps hike in policy rate was the most appropriate measure in its tool kit to temper the accelerating inflation.
Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said the board was keeping the reserve requirement ratio for banks at 18 percent for the rest of the year after two cuts early this year.
However, he said the reserve requirement cut may resume next year, in line with his goal of reducing it to a single digit within his term as BSP governor.
In deciding on the latest interest rate adjustment, Espenilla said the Monetary Board noted that latest baseline forecasts shifted higher over the policy horizon, indicating some risk of inflation exceeding the target in 2019.
He said upside risks also continued to dominate the inflation outlook as the sustained increase in core inflation suggested broadening price pressures amid resilient aggregate demand conditions.
The Monetary Board also reaffirmed its support for carefully coordinated efforts with other government agencies in implementing non-monetary measures to further mitigate the impact of supply-side factors on inflation.
The BSP adjusted upwards the inflation forecasts for 2018 and 2019. The forecast for this year was increased to 4.9 percent from the estimate of 4.5 percent made during the June 20 meeting. The forecast for 2019 was likewise raised to 3.7 percent from 3.3 percent previously. The board also announced the 2020 inflation forecast at 3.2 percent.
Bangko Sentral Deputy Governor Diwa Guinigundo said the board took into consideration four factors in adjusting the inflation forecast for 2018. These were the increase in jeepney fares (which was granted by the in the National Capital Region, Regions 3 and 4), water rate increases, increase in excise taxes for tobacco and higher oil prices.
Espenilla expressed optimism that the rate hike could prop up the peso. He said it was premature to make further statement on the peso at the moment, saying any movement by monetary authorities should be guided by pertinent economic data.
ING Bank Manila senior economist Joey Cuyegkeng said the BSP delivered an aggressive policy response to anchor inflation expectations as it signaled last month. He said the move also supported the peso, which had contributed to rising inflation.
The inter-agency Development Budget Coordination Committee earlier adjusted upward the inflation forecast in 2018 to a range of 4 percent to 4.5 percent from the previous estimate of 2 to 4 percent.
However, the DBCC kept the forecast of 2 percent to 4 percent from 2019 until 2022.