Philippines raises rate for 2nd month, stresses vigilance

June 20, 2018

By CentralBankNews.info
      The Philippine central bank raised its monetary policy rates for the second month in a row, saying it is ready to take further action if needed and emphasized its “continued vigilance against developments, including excessive peso volatility, that could affect the outlook for inflation.”
      Bangko Sentral ng Pilipinas (BSP) said it “is prepared to take further policy action as needed to achieve its price and financial stability objectives.”
      BSP raised its benchmark overnight reverse repurchase (RRP) by another 25 basis points to 3.50 percent, along with its overnight lending and deposit rates, a move that was expected by most analysts.
      The benchmark rate has now been raised 50 basis points following the hike in May, which was the first rate hike by BSP since September 2014.
      Today’s rate hike follows a rise in inflation in May to 4.6 percent, the fifth month of accelerating inflation and the third month inflation has been over the central bank’s target range of 2 -4 percent around a 3.0 percent midpoint.
      Explaining the reason for its second consecutive rate increase, BSP said inflation expectations for this year remained elevated and this posed a risk of further prices increases.
      And while 2019 inflation expectations remain within the target range, BSP said elevated expectations for this year posed a risk of sustained price pressure from future wage and prices.
      Rising oil and commodity prices is also expected to have a stronger effect on inflation given robust demand in the Philippines, underlying that upside risks dominate the inflation outlook.
      Last week’s hawkish stance by the U.S. Federal Reserve has also put further pressure on the exchange rate of the peso, which the raises import prices and adds to inflationary pressure.
      The peso has been weakening all year and was trading at 53.46 to the U.S. dollar today, down 6.5 percent since the start of this year.

   
       Bangko Sentral ng Pilipinas released the following statement:

“At its meeting on monetary policy today, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points to 3.50 percent, effective Thursday, 21 June 2018. The interest rates on the overnight lending and deposit facilities were likewise raised accordingly.
In deciding to raise the BSP’s policy interest rate anew, the Monetary Board noted that inflation expectations remained elevated for 2018 and that the risk of possible second-round effects from ongoing price pressures argued for follow-through monetary policy action. Although inflation expectations remain within the target range for 2019, elevated expectations for 2018 highlight the risk posed by sustained price pressures on future wage and price outcomes. Equally important, while latest baseline forecasts have shifted lower for 2018-2019, upside risks continue to dominate the inflation outlook, even as various measures of core inflation continue to rise. Moreover, the impact of international oil and commodity price movements on overall inflation is expected to be stronger given prevailing robust aggregate demand conditions.
Given these considerations, the Monetary Board believes that further policy action enables the BSP to reinforce its signal on safeguarding macroeconomic stability in an environment of rising commodity prices and ongoing normalization of monetary policy in advanced economies. The Monetary Board likewise reiterates its support for carefully coordinated efforts with other government agencies in implementing non-monetary measures to mitigate the impact of supply-side factors on inflation.
The Monetary Board also emphasized the BSP’s continued vigilance against developments, including excessive peso volatility, that could affect the outlook for inflation. The BSP is prepared to take further policy action as needed to achieve its price and financial stability objectives.”
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