Wage, fare hikes prompt BSP to tweak policy rates

Adjustments on minimum transport fares and daily wages of workers in Metro Manila have prompted the Bangko Sentral ng Pilipinas' decision to tweak policy rates for the fifth time this year, London-based think tank Capital Economics said Friday.

The BSP's policy-setting Monetary Board on Thursday, November 15, raised key policy rates by 25 basis points. The policy action brought the overnight borrowing rate to 4.75 percent, the overnight lending rate to 5.25 percent and the overnight deposit rate to 4.25 percent.

This is the fifth consecutive rate hike this year - 25 basis points in May and June, 50 basis points each in August and September, and another 25 basis point in November - for a total of 175 basis points.

"The BSP’s policy statement again highlighted the Bank’s concerns about elevated inflation expectations," Capital Economics said in a research note.

"We suspect that minimum wage and transport fare hikes over the last month fed into its decision to tighten policy again," it said.

In October, the LTFRB made permanent the P1 provisional jeepney fare increase in July and approved another P1 hike, raising the minimum fare to P10 from P8.

Also, the board approved a provisional P1 increase in public utility bus fares in Metro Manila and provisional fare adjustments for provincial bus operations.

Last November 5, the Department of Labor and Employment approved a P25 increase in the daily minimum wage of workers in the National Capital Region. The wage adjustment will take effect on November 22.

Despite the expected inflationary pressures from the wage and fare increases, Capital Economics noted that the central bank seems confident that inflation will begin to come down over the coming months.

But an interest rate hike is warranted to temper inflation expectations.

Inflation was unchanged at a nine-year high of 6.7 percent last October.

"For one, food price inflation, which has finally started to ease, should begin to drop back more quickly in the months ahead," Capital Economics said.

"The National Food Authority has increased its purchases of foreign rice, which should ease supply constraints," it said.

Legislation to replace the current system of rice import quotas with a tariff regime has now passed Congress and is expected to be implemented within the month.

"The move should knock 0.4 percentage points from the headline rate of inflation," Capital Economics said.

"The BSP emphasized 'the need for follow-through non-monetary measures to mitigate the impact of supplyside factors on inflation'," it added.

Moreover, the think tank noted that fuel price inflation should begin to moderate on the back of lower oil prices.

"Timely data show that domestic pump prices have fallen for the last few weeks, tracking falls in global oil prices. This trend likely has further to run. Our commodities team expects oil to fall to $55 0per barrel) by end-2019," Capital Economics said.

"Finally, the impact of indirect tax hikes on highsugar drinks, fuel, tobacco and alcohol, will drop out of the annual comparison in January, putting further downward pressure on inflation," it said.