BSP hints at strong monetary adjustment on Aug 9

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) hinted at a strong follow-through monetary adjustment when the Monetary Board meets on Aug. 9 as it takes into account the potential price pressures of excessive volatility in the foreign exchange market.

In his opening remarks during the release of the second quarter 2018 BSP Inflation Report, BSP Governor Nestor Espenilla Jr. said monetary authorities are considering strong follow-through actions after delivering back-to-back rate hikes in May and June.

“Let me say that the BSP is considering strong follow- through monetary adjustment at the next meeting of the Monetary Board in August. The pace and magnitude of policy tightening will necessarily be dependent on our comprehensive and rigorous assessment of all relevant data and forecasts,” Espenilla said.

The central bank has so far raised benchmark rates by 50 basis points to curb rising inflationary pressures. It lifted interest rates by 25 basis points for the first time in more than three years on May 10 followed by another 25 basis points last June 20.

Inflation leapt to a fresh five-year high of 5.2 percent in June from 4.6 percent in May, bringing the six-month average to 4.3 percent and exceeding the BSP target of two to four percent.

“In deciding to hike the policy rate during the quarter, the Monetary Board noted that the increase in inflation expectations and the risks of possible second-round effects argued for timely and decisive monetary policy actions from the BSP,” he said.

The BSP chief said elevated expectations for 2018 highlighted the risk posed by sustained price pressures on future wage and price outcomes, while upside risks continued to dominate the outlook as various measures of core inflation continued to rise.

According to Espenilla, the unwinding of accommodative monetary policy in the US and other advanced economies would likely continue and drive capital flows away from emerging economies including the Philippines, while global inflation remained elevated in the second quarter amid geopolitical tensions between the US and some key oil producing countries.

In the domestic front, he said the uptick in the prices of certain food items and domestic petroleum products would continue amid the weight of supply-side price pressures.

Espenilla said the central bank is keeping a watchful eye on developments in the foreign exchange market and their potential impact on inflation in the coming months.

“In particular, we are taking into account the potential price pressures of excessive volatility in the foreign exchange market. While we believe that our fundamentals remain solid and healthy, sustained pressures on the peso could adversely affect inflation expectations,” he said.

The peso is the second worst performing currency in the region after the Indian rupee. The local currency has depreciated 6.74 percent as it hit a fresh 12-year low of 53.53 to $1 last Thursday.

“Amid this resilience, the Philippine economy is being tested by external headwinds emanating from the recent and planned interest rate hikes by the US Fed and brewing trade tensions among key economies. These are exerting depreciation pressures on the peso,” Espenilla said.

Espenilla said the BSP still sees inflation peaking in the third quarter of the year and vowed to stay vigilant and monitor the data in terms of necessary follow through actions from the two initial rate hikes.