More rate hikes likely versus inflation – Espenilla

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said they are open for further policy action to temper inflation pressures but they also have some space to wait it out until prices come down.

“We will have to decide if this is really going to continue on or we can already bide our time as we wait for inflation to settle down back to the target as we have anticipated,” Espenilla said.

Signalling to the market of BSP’s readiness to implement a strong followthrough response usually means an aggressive action of 50 basis points interest, hike while the market would see a calibrated move to be more of a gradual increase.

After raising monetary policy rate three times in a row this year to a total of 100 basis points, Espenilla said they are satisfied with the pace of their rate adjustments that will not derail growth.

Based on the law that created the central bank, the BSP is tasked to maintain price stability that is supportive of economic growth.

“We are quite comfortable that moving interest rates in this calibrated fashion will not necessarily compromise our economic growth,” Espenilla said.

“It is true that the Gross domestic product (GDP)slowed down in the second quarter but six percent in this volatile world is not something to be ashamed of. In fact we’re still one of the fastest growing economies in the region,” he added.

Espenilla said that price stability not only encourages economic growth but also “allows households and businesses to plan ahead and make informed consumption, investment, saving, and production decisions.”

“Uncertainty is lowered (and) managed inflation also protects the purchasing power of the poor, which is important as the poor are vulnerable without adequate assets to hedge against high inflation,” the BSP chief said.

He reiterated that the current elevated inflation expectations to a large extent are based on supply-side factors such as increased prices of rice and fish and to some extent, excise taxes affected quite a number of commodity as well.

What the BSP is closely watching out for are second-round factors and the spread of inflation to other products. “That’s a red flag to the BSP and could trigger our actions,” he said.

On Friday, the BSP chief said that based on initial data and as shown in their inflation charts, the August inflation will be higher than July’s 5.7 percent but not likely to exceed six percent.

BSP numbers also point to an August peak since the transitory effects of excise tax reforms may be already waning. By September or October, the BSP expects inflation rate to start coming down.

During its August 9 Monetary Board policy meeting, the BSP readjusted its inflation forecasts to 4.9 for 2018 and 3.7 percent for next year, compared to previous estimates of 4.5 percent and 3.3 percent, respectively.

For 2020, like in 2019, the forecast of 3.2 percent is within the two-four percent inflation target.

Espenilla said that for six years in a row or from 2009 to 2014, the BSP’s inflation targeting has been spot on. “During episodes when inflation was above or below target, there were external or supplyside developments beyond the ambit of monetary policy.”

The BSP, which adopted the inflationtargeting framework in 2002, is heavily guided by data and a “forward- looking assessment” which Espenilla said is a “disciplined and structured approach (and that) means that we refrain from reacting to short-term fluctuations or commentaries.”