Central bank says ‘considering strong follow-through monetary adjustment’

By Elijah Joseph C. Tubayan Reporter
THE BANGKO Sentral ng Pilipinas (BSP), in its clearest statement lately on future policy steps, said on Friday that it was “considering strong follow-through monetary adjustment at the next meeting of the Monetary Board in August” in a bid to rein in price pressures.
Saying that “the BSP will sustain its utmost vigilance”, BSP Governor Nestor A. Espenilla, Jr. said in opening remarks for the second-quarter inflation briefing at the central bank headquarters in in Manila that monetary authorities “are taking into account the potential price pressures of excessive volatility in the foreign exchange market.”
The central bank chief made his remarks as the Department of Finance separately e-mailed an assessment showing expectation of even faster inflation this month.
BSP’s Monetary Board is scheduled to review policy on Aug. 9 a few hours after the Philippine Statistics Authority (PSA) reports second-quarter gross domestic product growth — which economic managers hope would clock in at seven percent from January-March’s 6.8% and the 6.6% recorded in second quarter 2017 and against the government’s 7-8% target for 2018 — and two days after the PSA releases July inflation data.
Fitch Ratings on Wednesday flagged the risk of overheating (characterized by production’s inability to keep up with rising demand in a fast-growing economy) — “evident from a recent rise in inflation, rapid credit growth and a widening trade deficit” — even as it affirmed the Philippines’ credit rating at a notch above minimum investment grade, with a “stable” outlook. The debt watcher said “steps taken by the Bangko Sentral ng Pilipinas to tighten monetary policy may contain these risks”.
DEMAND-SIDE PRESSURES
“While we believe that our fundamentals remain solid and healthy, sustained pressures on the peso could adversely affect inflation expectations,” Mr. Espenilla said, adding that “some demand-side pressure may also be already feeding into inflation.”
“All of these warrant a firm and timely monetary response. Therefore, let me say that the BSP is considering strong follow-through monetary adjustment at the next meeting of the Monetary Board in August,” he said.
“The pace and magnitude of policy tightening will necessarily be dependent on our comprehensive and rigorous assessment of all relevant data and forecasts.”
BSP’s Monetary Board adopted back-to-back interest rate increases of 25 basis points each in its May and June meetings, marking the first hikes in nearly four years.
Inflation rose for the sixth straight month to a fresh five-year-high 5.2% in June — marking the fourth consecutive month that the pace of overall price increases pierced the central bank’s 2-4% target range for full-year 2018.
Inflation picked up to 4.8% last quarter from 3.8% in 2018’s first three months, the BSP said.
That took the year-to-date average to 4.3%, slower than the central bank’s downgraded 4.5% forecast for this year.
Mr. Espenilla said on Friday that monetary authorities “still see the peaking of inflation around the third quarter, but we also see down the road by 2019, that inflation is on track and on target”.
EVEN FASTER IN JULY
The Finance department said in a separate economic bulletin on Friday said that the rise in prices of widely used goods likely sped up this month to 5.3% over bigger year-on-year increases for fuel as well as food, tobacco and alcohol.
However, it noted that the month-on-month increase decelerated to 0.17% from 0.6% in June, due to a slowdown for both food and non-food items.
“The only items which deviated from the trend are five items: tobacco which accelerated to 1.23%, housing, utilities and fuels which rose by 0.43% on account of the lagged impact of petroleum products on electricity prices, health which rose by 0.26% and two other items which rose slightly,” the department said.
BSP Deputy Governor Diwa C. Guinigundo said in the same briefing that upside pressures to inflation could come from increases in the daily minimum wage and electricity bills, as well as faster-than-expected policy normalization in the United States.
Downward pressures, Mr. Guinigundo added, could come from slower global economic growth due to protectionist policies and geopolitical tensions in advanced economies, as well as the replacement of the quantitative restriction with a deregulated tariff scheme for rice imports.
The Land Transportation Franchising and Regulatory Board (LTFRB) on July 4 approved a P1 provisional fare hike for public jeepneys plying routes in Metro Manila, Central Luzon and the Cavite-Laguna-Batangas-Rizal-Quezon region.
The Department of Labor also announced earlier this week the hike in minimum wages in nine regions, with adjustments ranging from P9 to as much as P56.
GROWTH MOMENTUM INTACT
Mr. Guinigundo said tighter monetary policy should not stifle the country’s economic growth momentum.
“Domestic demand remained solid,” Mr. Guinigundo noted.
“The economy as a whole will be able to sustain momentum amid adjustments in policy interest rates,” he added, noting the “appropriateness of recent monetary policy actions.”
Mr. Espenilla said that domestic output growth “remains robust” due to capital formation and household consumption, as well as strong performance of services and industry, and is supported by a “stable Philippine banking system” where asset quality remained “healthy” alongside “ample” domestic liquidity.
“However, amid this resilience, the Philippine economy is being tested by external headwinds emanating from the recent and planned interest rate hikes by the US Fed and brewing trade tensions among key economies,” Mr. Espenilla noted.
“These are exerting depreciation pressures on the peso. The country’s current account deficit and higher inflation also dampened investor sentiment during the quarter,” he added.
“The BSP kept a close eye on developments in the foreign exchange market and noted their potential impact on inflation in the coming months.”