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ACCELERATING inflation already well above the full-year
target in only the first four months could push domestic
interest rates higher in the near term, former central
bank governor Jose Cuisia Jr. said Wednesday.
The
increase will also likely force the hand of the Bangko
Sentral ng Pilipinas (BSP) that, for the moment, seems
loath to hike its policy rates upward as a consequence,
Cuisia said at a briefing held at the Philam Tower along
Paseo de Roxas in Makati City.
BSP
Deputy Governor Diwa Guinigundo signaled this prudent
approach by telling Bloomberg News, which sought his
comments on monetary policy and inflation, that the BSP
stance at the moment remained neutral, notwithstanding
Tuesday’s report that April inflation shot way past
expectations at 8.3 percent. He gave his remarks in an
e-mailed message Wednesday to Bloomberg.
Cuisia
gave his views at a separate briefing at his company’s
Philam Tower.
“With
significantly higher inflation, we will probably see
higher interest rates [in the coming months]. This will
have significant impact on our investment income,” the
president and chief executive officer of the Philippine
American Life and General Insurance Co. said.
According to him, a procrastinating BSP “will put a lot
of pressure on the Monetary Board if they don’t do
anything” by way of response.
“They’re
understandably reluctant and there’s a reason for it.
They fear the impact of second-round effects.
They
have no choice but to increase interest rates although
for now they’re trying to hold back,” Cuisia said.
Let it
also be said, he quickly added, that BSP Governor Amando
M. Tetangco Jr. and six other members of the Monetary
Board, “have done a great job of managing inflation as a
whole.”
The
textbook response to high inflation is to tighten or
raise the BSP’s policy rates now pegged at 5 percent for
borrowing and 7 percent for lending.
The
current policy mix recognizes that broad money growth is
sufficiently large, but only large enough to drive
growth averaging as high as 6.3 percent or one full
percentage lower than a year ago.
An
interest rate hike, therefore, heightens the likelihood
of a slower than projected growth, which everyone
dislikes.
Add also
soaring oil and nonoil commodity prices driven by
supply-side factors do not respond to monetary policy
adjustments.
Inflation accelerated to 8.3 percent in April from a
year earlier, the fastest pace since May 2005. The
central bank, which cut the benchmark rate five times
between July and January to a 16-year low of 5 percent,
hasn’t increased the overnight borrowing rate since
October 2005. The next monetary policy meeting is on
June 5.
“Once we
see even early signs of second-round effects and
disanchoring of inflation expectations which could lead
to higher inflation, we are prepared to review our
monetary policy, which is presently neutral,” Guinigundo
said in an e-mail Wednesday.
It’s
“difficult to say whether inflation has peaked or not.
Oil and food commodity prices may continue unprecedented
surges, not to mention the second round effects which
aggravate rather than mitigate price pressures.”
This
early most analysts, including the British-owned lender
HSBC, bet on a series of interest rate hikes that will
lift the central bank’s borrowing rate in increments of
25 basis points to 5.75 percent towards the end of the
year.
Revised
numbers proposed for Cabinet approval by the Development
and Budget Coordination Committee include, among others,
forecast GDP averaging 6.1 percent this year, Treasury
bill rates averaging three percent to four percent,
inflation ranging from 4-5 percent and a barrel of
imported oil costing $90 a barrel from $62 previously.
(With Bloomberg) |
