Despite slowing growth, BSP continues rate hike salvo amid inflation
In an update of its annual economic publication, the Manila-based institution said it expects Philippine inflation, which is now far higher than the rest of Asia, to average 5 percent in 2018, before tapering off to 4 percent in 2019.
The STAR/Michael Varcas

Despite slowing growth, BSP continues rate hike salvo amid inflation

Ian Nicolas Cigaral (Philstar.com) - November 15, 2018 - 5:56pm

MANILA, Philippines — The Bangko Sentral ng Pilipinas decided Thursday to tighten monetary policy for a fifth straight month this year to anchor elevated inflation expectations.

At its November meeting, the policymaking Monetary Board raised its key rate by a modest 25 basis points. In a bid to fight inflation, the central bank has delivered back-to-back interest rate hikes of 1.75 percentage points since May.

Inflation clocked in at 6.7 percent in October, unchanged from September’s clip but still the fastest pace in nearly a decade. Year-to-date, inflation averaged 5.1 percent, well above the government’s 2-4 percent target band.

“The Monetary Board believes that prospects for the domestic economy remain generally favorable and allow some scope for a measured adjustment in the policy rate to rein in inflation expectations and preempt further second-round effects,” the BSP said in a statement.

“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,” it added.

For 2018, the BSP adjusted its inflation forecast to 5.3 percent, higher than 5.2 percent previously amid the expected upward price pressures from the recently approved increases on fares and wages.

The central bank, meanwhile, slashed its inflation outlook for 2019 to 3.5 percent from its earlier estimate of 4.3 percent, citing the impact of rice tariffication and suspension of new round of oil tax hike.

“The latest view is that we are looking at a deceleration of inflation going forward and that’s is reflected in our forecast as well,” BSP Director Dennis Lapid told a press conference.

Higher interest rates discourage people from borrowing money and from spending, causing a decline in demand which, in turn, tempers inflation. This also makes securing bank credit for business expansion plans more expensive.

May be last hike 'in current cycle'

In the third quarter, the Philippine economy slowed down to a three-year low of 6.1 percent, as surging borrowing costs and red-hot inflation weigh on consumer spending, which has traditionally been the driving force behind growth.

“If we are right, then we think today’s hike will be the last in the current cycle,” London-based think tank Capital Economics said in a commentary. “The BSP will also be concerned about pressing the brakes too hard given the worsening outlook for economic growth.”

In the July-September period, household consumption grew 5.2 percent, its lowest level in four years, from 5.9 percent in the second quarter. Meanwhile, government spending and investments were up by 14.3 percent and 21.5 percent, respectively, helping offset the weaker punch from household expenditure.

Socioeconomic Planning Secretary Ernesto Pernia said the Philippines would have expanded by 6.5-7 percent last quarter had soaring prices been controlled, adding that the state’s downwardly revised 6.5-6.9 percent goal for this year is now “much more challenging” to hit.

“The latest real [gross domestic product] growth number is within the trend growth of the Philippine economy,” BSP Deputy Governor Ma. Almasara Cyd Tuaño-Amador said.

“So we think the price stability objective can still be firmly safeguarded because the growth prospects of the economy continue to be cautiously optimistic,” she added.

PHILIPPINE INFLATION
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