The central bank of the Philippines raised its monetary policy rate for the third month in a row to “rein in inflation expectations and prevent sustained supply-side price pressures from driving further second-round effects,” but signaled that it may now pause in its tightening campaign.
Bangko Sentral Ng Pilipinas (BSP) raised its benchmark overnight reverse repurchase facility (RRP) rate by a sharp 50 basis points to 4.0 percent and has now raised it by a total of 100 points this year following increases in May and June as inflation continues to accelerate.
The rate hike was expected and follows the BSP’s warning in its June policy statement that it was prepared to take further action and statements last month by its governor, Nestor Espenilla, that the central bank is considering strong action to curb inflation, which he said may first peak in the third quarter, and dampen volatility in the foreign exchange market.
BSP said the latest forecasts have shifted upward and show that inflation may also exceed the central bank’s target in 2019. Up to now, BSP was confident that inflation would return to its target of 2 – 4 percent, around a 3.0 percent midpoint, next year.
“Upside risks also continue to dominate the inflation outlook, as the sustained increase in core inflation suggests broadening price pressures amid resilient aggregate demand conditions,” BSP said, adding that inflation expectations remain elevated though still within the target for 2019.
Inflation in the Philippines rose for the seventh month in a row to 5.7 percent in June, the highest reading since March 2009, and the fifth month it has topped the BSP’s upper inflation limit.
BSP has previously forecast that inflation would average 4.5 percent this year and then 3.3 percent in 2019.
But the central bank’s monetary board also signaled that it may now pause in further rate hikes, saying its actions so far this year “will help reduce further risks to inflation,” including those emanating from the normalization of monetary policy in advanced economies and its impact on currency markets and help bring inflation toward its target.
Although the Philippine economy slowed in the second quarter, BSP seemed confident that its tighter policy would not result in a economic slump.
“Favorable conditions arising from sustained domestic growth also suggests that the economy can accommodate a further tightening of monetary policy settings,” BSP said.
The Gross Domestic Product of the Philippines slowed to quarterly growth of 1.3 percent in the second quarter of this year for annual growth of 6.0 percent, down from 6.6 percent in the first quarter.
After falling sharply between January and mid-July on broad-based U.S. dollar strength, the Philippine peso has staged a comeback in recent weeks and was trading around 53.0 to the dollar today, up from lows around 53.6 on July 19 but still down 5.7 percent since the start of this year.
Last month the International Monetary Fund raised its 2018 inflation forecast for the Philippines to 4.7 percent from an earlier 4.2 percent and said the BSP would have to consider further monetary tightening to douse inflation expectations.
The IMF also lowered its 2018 growth forecast to 6.7 percent from 6.8 percent.
Bangko Sentral Ng Pilipinas issued the following statement: