BSP ready to recalibrate policy stance

Monetary authorities are prepared to recalibrate the country’s policy stance, if the earlier rate hike is not enough to keep inflation within the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

BSP officer-in-charge Diwa Guinigundo said the decision of the central bank’s Monetary Board to lift interest rates by 25 basis points last May 10 was necessary to meet the two to four percent target for 2019.

Guinigundo said the BSP would continue to monitor oil prices, as well as the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

“But if new developments take place – higher oil prices beyond our assumptions, more second round effects are triggered like higher wage and transport adjustments – then obviously we would have to go back to our drawing board and decide on future moves to achieve our target,” he said.

The BSP shifted to the inflation targeting framework of monetary policy in 2002 to achieve its mandate of promoting price stability conducive to a balanced and sustainable economic growth.

To achieve the target, the central bank uses several policy instruments including the policy rate, the term deposit auction facility, the overnight lending and deposit facilities, the reserve requirement ratio, among others.

“This is the essence of being data dependent. At a certain point, your policy moves makes a lot of sense and purpose. A few weeks later, when more data are available, then a review is necessary when policies need some recalibration in terms of direction and magnitude,” Guinigundo said.

The BSP has set an inflation target of two to four percent. In the first four months, the average was breached reaching 4.1 percent as the consumer price index kicked up to a fresh five-year high of 4.5 percent in April from 4.3 percent in March.

This prompted the BSP’s Monetary Board to raise the overnight reverse repurchase facility by 25 basis points to 3.25 percent to help arrest potential secondround effects by tempering the buildup in inflation expectations.

The BSP also raised its inflation target to 4.6 instead of 3.9 percent for this year, and to 3.4 instead of three percent for 2019.

Nomura Securities economist Euben Paracuelles said the central bank is seen delivering back-to-back rate hikes in its June and August meetings to bring the rate to 3.75 percent by the end of the year.

“We, therefore, maintain our forecast that BSP will follow up with 25 basis points policy rate hikes at each of its next two meetings in June and August, taking the policy rate to 3.75 percent this year,” Paracuelles said.

The economists said Nomura sees inflation accelerating further to average 4.7 percent in the second quarter and 5.1 percent in the third quarter.

Chidu Narayanan, economist for Asia at Standard Chartered Bank, said inflation is edging close to six percent in August as the second-round effects of the tax reform law would be felt in the second half.

Narayanan said the Monetary Board is set to impose another 25 basis point rate hike on June 21.

The BSP has kept an accommodative policy stance for more than three years to support the country’s growing economy through a low interest rate regime. Prior to last May 10, the central bank last raised interest rates by 25 basis points in September 2014.