BSP vows strong response to 5.7% July inflation turnout

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said the galloping July inflation turnout of 5.7 percent – which was at the high end of the BSP’s 5.1-5.8 percent forecast range for the month – determines how strong the Monetary Board will respond on Thursday to protect the 2019 inflation outlook.

Espenilla said that despite the July actual inflation hitting near peak of the forecast, the inflation path “remains consistent with our expectation of elevated inflation prevailing in 2018 that will return to the target range by 2019.”

“We will consider all the latest data updates in determining the strength of our follow-through response in the upcoming policy meeting of the Monetary Board this Thursday,” he added. “I reiterate the BSP’s firm commitment to meet the inflation target of two-four percent (in 2019).”

The market expects the seven-member Monetary Board to vote to raise the benchmark rate either by 25 basis points or by a more aggressive 50 basis points tomorrow (Thursday). An August 9 policy rate increase will be the third time this year that the BSP adjusted rates higher after May 10 and June 20’s respective 25 basis points hike.

As early as July 26, Espenilla already announced to the market that the Monetary Board will consider what he called “strong follow-through monetary adjustment” on August 9 as they assess the weight of supply-side price pressures. This aggressive signalling reaffirmed the BSP’s commitment to return the inflation rate back to the target next year.

The BSP currently has a 2018 average inflation forecast of 4.5 percent and 3.3 percent for 2019. The inter-agency Development Budget Coordinating Committee has a 2018 inflation projection of four percent to 4.5 percent.

The risks to inflation this year remain tilted to the upside due to higher and volatile global oil prices, rising global inflation, depreciating peso vis-à-vis the US dollar, and effects of the implementation of the TRAIN law on prices of domestic goods. Government spending on infrastructure, potential rise in wages, adverse weather conditions, and higher utility rates are also primary inflationary pressures.

The BSP has an arsenal of tools for managing inflation and liquidity to promote price stability, but Espenilla reiterated the central bank’s support of non-monetary reforms including the rice tariffication system and TRAIN-related mitigation measures to offset supply-side price pressures.

Espenilla said that inflation upticks are mostly assessed as transitory and would slow down within the target in 2019. The two rates’ hike in the last two Monetary Board meetings were intended to re-anchor inflation expectations and temper second-round effects.