Bangko Sentral considering 'strong follow-through' policy action to fight inflation

Ian Nicolas Cigaral - Philstar.com
Bangko Sentral considering 'strong follow-through' policy action to fight inflation
A vendor hands over chopped meat to a customer at Nepa Q Mart market in Kamuning, Quezon City on Tuesday, July 3, 2018.
The STAR / Michael Varcas

MANILA, Philippines — The Bangko Sentral ng Pilipinas is considering a “strong” monetary policy action at its next meeting in August in a bid to fight rising inflation, which has been made worse by a weaker peso and creeping “demand side pressures.”

At a press conference Friday, BSP Governor Nestor Espenilla signaled that the BSP is building the case for a third rate hike this year.

“Some demand side pressure may be already feeding into inflation. All of this warrants a firm and timely monetary response,” Espenilla said.

“Therefore, let me say that the BSP is considering a strong follow-through monetary adjustment at the next meeting of the monetary board in August,” he added.

Higher interest rates discourage people from borrowing money and spending, causing a decline in demand which, in turn, tempers inflation and can even slow down the country’s economic growth.

Inflation spiked to a fresh five-year high of 5.2 percent in June from May’s 4.6 percent. Year-to-date, inflation averaged 4.3 percent, above the central bank’s 2-4 percent target range.

People have blamed soaring prices on the Duterte administration’s tax reform law, which raised excise levies on fuel and “sin” products, among others. Supply-side factors like higher global oil prices—exacerbated by the continuing depreciation of the peso—have been pushing up commodity prices.

To tame inflation and lend some strength to the depreciating peso which has been hovering near a 12-year low against the dollar, the BSP has lifted its benchmark rates twice this year.

But analysts say more monetary policy actions are necessary to temper inflation and contain capital flight. In a research note, British banking giant HSBC said a 50 basis points (bps) hike is needed over the traditional 25 bps adjustment to rein in inflation.

"Among the main upside risks to future inflation are potential wage adjustments and transport fare hikes due to higher excise taxes on petroleum products and other key commodities, as well as faster-than-expected monetary policy rate hikes in the US," the BSP said.

In an economic bulletin, the Department of Finance said inflation might have hit 5.3 percent in July due to higher prices of food, tobacco, fuel and electricity.

The government will release the July inflation data on August 7.

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