Policy rates steady on inflation view
MONETARY AUTHORITIES held fire on policy rates on Thursday, marking the end of five straight tightening moves this year, amid expectations that inflation will decelerate faster than initially thought.
The policy-setting Monetary Board of the Bangko Sentral ng Pilipinas (BSP) voted to keep benchmark interest rates unchanged on Thursday, keeping the range at a nine-year-high 4.25-5.25%.
Inflation is now expected to trek a “lower path” over the next two years, prompting the BSP to steady benchmark rates.
“Recent headline inflation readings indicate signs of receding price pressures as constraints on food supply continue to ease with the implementation of various non-monetary measures,” BSP Assistant Governor Francisco G. Dakila, Jr. said in a press briefing.
“Inflation expectations have also steadied given the decline in international crude oil prices and the stabilization of the peso,” he added.
“The baseline projection is that we will be back to below four percent by around the end of Q1 2019. This is a significant shortening of the… period when we will be above the inflation target band.”
The pause comes in the wake of five straight rate increases totalling 175 basis points (bp) since May, with two consecutive hikes worth 50 bp launched in August and September as inflation surged to the highest level in nearly a decade. The key policy rate is now 4.75%. Eleven of 12 economists asked in a
BusinessWorld poll last week said they expected the BSP to keep rates steady,
convinced that inflation is finally on its way down.
Inflation eased to six percent last month from a nine-year-high 6.7% in September and October, confirming the state’s view that price increases will soften and will eventually return to the 2-4% target range some time next year.
However, the year-to-date pace still averaged 5.2% in the 11 months to November against the central bank’s 2-4% target range for 2018.
“… [T]he risks to the inflation outlook have become more evenly balanced for 2019 and lean toward the downside for 2020 amid a more uncertain global economic environment, which could further mitigate upward pressures from commodity prices in the coming months,” the central bank added.
“Given these considerations, the Monetary Board deemed it prudent for the time being to keep monetary policy settings steady and allow previous monetary responses to continue to work their way through the economy.”
Still, Mr. Dakila said the central bank is ready to “take further policy action” as needed to keep prices stable, even as he noted that policy makers now see “quite significant deceleration” in price pressures.
INFLATION EASING
The central bank also gave lower inflation forecasts until 2020, noting that risks to the outlook have been easing to return rates below four percent faster.
Dennis D. Lapid, director of the BSP’s Department of Economic Research, said inflation will average 5.2% this year, down from an earlier upgraded 5.3% forecast.
Overall price increases of widely used goods will further decelerate to 3.18% next year (from 3.5%) and to 3.04% (from 3.3%) by 2020.
“Food supply has normalized, and as we anticipate the rice tariffication bill to be put into law, that will normalize food and rice prices,” Mr. Dakila added, noting that the sharp drop in oil prices can be expected to persist until next year.
“Actually, even if oil prices were to rise significantly compared to where they are today, we are still anticipating that inflation will be within target. We’re now a lot more comfortable that the 2019 inflation target will be achieved.”
Central bank officials said during their November review that inflation will likely hover above target through the first half of 2019. END OF HIKES Bank analysts said the BSP is now at the end of its tightening cycle as inflation is becoming less of a problem.
Chidu Narayanan, economist at Standard Chartered Bank, said the BSP might not have to raise rates anymore as inflation will “likely to come down quite rapidly in 2019,” given a high base effect, and with the fading impact of tax reforms and poor weather.
“With inflation set to drop back sharply over the coming months, we suspect the next move will be a rate cut,” said Alex Holmes, economist at Capital Economics.
“With growth slowing and headwinds building, we think the emphasis will soon turn to support the economy.”
A “proactive” 25 bp tightening move was introduced during the BSP’s Nov. 15 meeting, which was meant to anchor inflation expectations.
Back then, central bank officials had already noted that nonmonetary measures introduced by the Executive have been taking effect, facilitating distribution of food and consequently alleviating price pressures.
Thursday’s decision means that key rates will remain steady until early 2019, as the next BSP review is set on Feb. 7.