Expect more rate hikes – think tank

Amid Elevated Inflation

MANILA, Philippines — Barcelona-based think tank Focus Economics expects more rate hikes this year as the Bangko Sentral ng Pilipinas (BSP) leaves the door open for further tightening to rein in inflationary expectations.

Joffrey Simonet, economist a FocusEconomics, said the BSP’s hawkish tone reaffirms its commitment to “take all necessary policy actions” to ensure macroeconomic stability and anchoring inflation.

“This signals that further interest rate hikes this year cannot be ruled out yet, although the BSP will likely wait for the impacts of its previous rate hikes to fully materialize before undertaking a new policy change,” Simonet said.

The BSP’s Monetary Board has so far raised interest rates by 100 basis points in three successive rate setting meetings in the last four months to curb rising inflation brought about by higher oil and commodity prices, weak peso, and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

It lifted rates by 25 basis points for the first time in more than three years last May 10 followed by another 25 basis points last June 20 and 50 basis points – the biggest increase in 10 years – last Aug. 9.

The next rate-setting meeting of the central bank’s Monetary Board is on Sept. 27.

 Based on its latest assessment, the BSP now expects inflation to average 4.9 percent this year instead of its earlier projection of 4.5 percent and 3.7 percent  instead of 3.3 percent next year amid ele-vated prices.

The consumer price index hit a fresh five-year high of 5.7 percent in July from 5.6 percent in June. This brought the average inflation to 4.5 percent in the first seven months, exceeding the BSP’s two to four percent target

“FocusEconomics expects inflation to average 4.6 percent in 2018, which is up 0.1 percentage points from last month’s projection. For 2019, panelists see inflation of 3.8 percent,” Simonet said.

The latest rate hike brought the yields of the overnight reverse repurchase facility  to four percent, the overnight deposit facility  to three percent, and the overnight lending facility to 4.5 percent.

Simonet said the latest decision came against a backdrop of elevated and rising inflationary pressures.

“With robust domestic momentum expected to continue in coming quarters, the BSP deemed that this third rate hike of the year would help rein in inflationary pressures and balance the ongoing monetary policy normalization in advanced economies—most notably by the US Federal Reserve—which has impacted foreign exchange markets and contributed to commodity price swings,” the economist said.