Monetary Board hikes key rates

KEY INTEREST RATES were hiked by the Monetary Board yesterday in a “preemptive” move aimed at anchoring persistently elevated inflation expectations.

The 25-basis-point increase in the Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing and lending rates, to 3.75% and 5.75%, respectively, was the first adjustment since October 2012 when they were trimmed — also by 25bps — to record lows of 3.5% and 5.5%.

Rates on special deposit accounts (SDA) and bank reserve requirement ratios (RRR) — the focus of policy adjustments earlier this year — were kept steady.

“The Monetary Board’s decision is a preemptive response to signs of inflation pressures and elevated inflation expectations … [and] in the context of the eventual normalization of monetary policy in some advanced economies,” central bank Governor Amando M. Tetangco, Jr. told reporters.

“[A]n increase in the BSP’s policy rates will moderate inflation pressures and arrest potential second-round effects by helping anchor inflation expectations,” he added.

“At the same time, the balance of risks to the inflation outlook continues to be tilted toward the upside, with price pressures emanating from higher food prices, short-term volatility in international oil prices, and pending petitions for adjustments in power rates and transport fares.”

Central bank Deputy Governor Diwa C. Guinigundo said that in particular, the decision was aimed at protecting the 2015 inflation target with this year’s goal seen “quite safe.”

The Monetary Board tweaked its inflation forecasts anew, with the 2014 pace now expected to average 4.33%, down from June’s 4.4%. The 2015 forecast, on the other hand, was raised to 3.72% from 3.65%.

“For the first time, we are giving our forecast for 2016, which is 2.8%,” Mr. Guinigundo added.

Inflation settled at 4.2% as of June. The central bank aims to keep the rise in consumer prices to within 3-5% this year and 2-4% in 2015 and 2016.

“The risk is focused on 2015, because if you look at 2014, there was some moderation in the forecast,” Mr. Guinigundo said.

“The Monetary Board is convinced that the 2014 target is quite safe. But 2015, this is something the Board wants to ensure that we do not breach that inflation target,” he added.

Previous policy adjustments — namely the two-percentage point reserve requirement hike in March and May and 25-bp increase in SDA rates in June — will also help manage inflation, he said.

“But inflation is at risk for 2015. This is the appropriate time to move the policy rate if only to send a signal to the market that the BSP wants to maintain price stability,” Mr. Guinigundo said, even as he noted that the central bank did not intend to raise inflation goals for the next two years.

What the central bank wants to achieve, he stressed, is a policy that brings about price stability without affecting the economy’s growth prospects.

Mr. Tetangco said, “The Monetary Board noted that the continued favorable outlook for domestic demand allows some scope for a measured adjustment in policy rates without adversely affecting the country’s growth prospects.”

“Going forward, the BSP will remain vigilant against risks to price and financial stability and stands ready to undertake further policy actions as necessary,” he added.

Analysts yesterday said the Monetary Board’s policy move showed the central bank’s commitment to maintaining price stability.

Bank of the Philippine Islands economist Emilio S. Neri, Jr. said it improved the chances of the 2-4% target for next year, with inflation still expected to peak in the coming months.

“The BSP’s decision to hike the RRP (reverse repurchase or overnight borrowing) rate also demonstrated that the below-consensus GDP growth print for 1Q2014 and the threat of a sustained slowdown throughout the rest of 2014 were not going to get in the way of carrying out the monetary authorities’ price stability mandate,” Mr. Neri said.

“Today’s decision, therefore, will likely be followed by additional mild adjustments through end-2015 which are not expected to have a worrisome impact on PHL output growth,” he added.

“We continue to expect PHL GDP growth to be among the fastest in the Asia region at 6.2% in 2014 and at 6.5% in 2015 even amidst this gradual tightening environment.”

DBS Bank Ltd. economist Gundy Cahyadi also noted that the central bank was making the adjustments from a position of strength.

“2Q GDP data at the end of August may show further easing of GDP growth momentum but this is partly a result of the high base effects. GDP growth momentum remains robust and 6-7% GDP growth remains almost certain to be seen this year,” Mr. Cahyadi said.

“Note also how the government remains expansionary in setting its 2015 budget proposal. The BSP is simply playing a balancing game here, which presumably also explains the decision to hold the SDA rate constant.”

Moving forward, Mr. Cahyadi said the BSP could raise key rates by another 25bps in September.

BPI’s Mr. Neri said, “We now see another 75 bps (from an original 50 bps) cumulative increase in the SDA and RRP rate through end-2015 but, like today’s decision, will continue to be very orderly adjustments to the normalization of monetary policy in the west.”

“This should prove to be a sharp contrast to the abrupt and destabilizing variety that we have seen and still expect to see from the sizeable tightening moves elsewhere in the emerging market space,” he added. –Bettina Faye V. Roc, Senior Reporter, Businessworld