Espenilla hints possible hike in BSP rates

FILE: BSP Gov. Nestor A. Espenilla, Jr. keynotes 2018 RBAP Annual National Convention in SMX Center, Davao on May 21 (Photo: Bangko Sentral ng Pilipinas/Facebook)

MANILA — Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. on Friday hinted the possibility of another increase in the central bank’s key rates in August to address potential price pressures generated by excessive foreign exchange volatility and its impact on inflation expectations.

The Monetary Board (MB) already twice raised key rates for a total of 50 basis points this year, bringing the overnight reverse repurchase (RRP) rate to 3.5 percent.

In his opening remarks at a briefing on the 2018 second-quarter inflation report, the central bank chief said the growth of the domestic economy remains robust due to the strong rise of capital formation and household consumption, as well as the performance of the services and industry sectors.

The banking sector is also supportive of the domestic growth since its assets and deposits continue to grow.

However, risks are up because of external developments, such as the rising interest rates and inflation in advanced economies and geopolitical tensions. In the domestic market, risks come from supply-side pressures resulting in a sustained uptick of inflation.

In the first half of the year, inflation averaged at 4.3 percent, higher than the government’s 2 percent to 4 percent target. Last June alone, it surged to 5.2 percent from the previous month’s 4.6 percent because of the faster rate of heavily-weighted food and non-alcoholic beverages index and the alcoholic beverages and tobacco.

Espenilla said inflation expectations of private sector economists also rose due to volatile global oil prices, weaker peso, and the transitory effects of the Tax Reform for Acceleration and Inclusion (TRAIN) law.

He said these developments are valid reasons for the hike in the BSP key rates to address possible second-round effects. “Although inflation expectations remain within the target range for 2019, elevated expectations for 2018 highlighted the risk posed by sustained price pressures on future wage and price outcomes,” he said.

He stressed that the MB’s recent policy decisions “signal its strong commitment to safeguard macroeconomic stability in an environment of rising commodity prices and ongoing normalization of monetary policy in advanced economy.”

However, since pressures continue to mount, he said another action may be needed when the Board meets on August 9. “The pace and magnitude of policy tightening will necessarily be dependent on our comprehensive and rigorous assessment of all relevant data and forecasts,” he said, citing the central bank’s inflation-targeting framework.

The BSP chief said monetary officials continue to see inflation this year peaking in the third quarter and to decelerate to within-target levels next year. “This remains our view. Nonetheless, we recognize that there are risks to this outlook and that’s why the BSP has been taking timely actions since the last two policy meetings,” he said.

“And we would continue to stay vigilant and monitor those in the data in terms of the necessary follow through actions from these two initial actions that we have made so far,” he added.