The Bangko Sentral ng Pilipinas (BSP) is seen shifting its monetary policy this year to favor a higher rate for the first time since 2014, as inflation is projected to hit close to the ceiling of government’s target for 2017, an international think tank said on Tuesday.
BMI Research—the think tank arm of the Fitch Group—said the Monetary Board could be looking at a policy rate hike of 50 basis points within the year in an effort to manage inflationary pressures and curb capital outflows amid rising global interest rates.
In a meeting early this month, the Monetary Board maintained interest rate on the central bank’s overnight reverse repurchase facility at 3 percent, with the corresponding interest rates on the overnight lending and deposit facilities also kept steady. Reserve requirement ratios were also left unchanged.
Central Bank Governor Amando M. Tetangco Jr. said in the May 11 meeting that current inflation dynamics remain manageable, allowing the Monetary Board to maintain rates at the moment.
However, Tetangco said risks to inflation remain tilted to the upside and said the central bank will “remain vigilant” to the movement of prices in the country and “will adjust its policy settings as needed”.
That the balance of risks are skewed to the upside, according to BMI, strengthens their view that the central bank will tighten its belts before end-2017 “as it grapples with rising inflationary pressures and possible capital outflows as the US Federal Reserve moves to normalize interest rates”.
“Although headline inflation came in at 3.4 percent year-on-year in April, which was well within the BSP’s target range [2 percent to 4 percent] for 2017-2018, we expect price pressures to continue to mount over the months on the back of higher transportation and electricity prices, the transitory upside impact of the proposed tax-reform program, and the government’s expansionary fiscal plans,” the BMI said in its report.
“We forecast inflation to reach 4 percent by the end of the year, and this will likely push real interest rates further into negative territory,” BMI added.
Although the BSP admitted that pressures are mounting on the upside of the growth of consumer prices, the current models say inflation will be well within the 2-percent to 4-percent target this year.
In particular, the BSP maintained its inflation forecast at 3.4 percent for this year.
The BSP said the Monetary Board took into account higher actual inflation numbers in March and April and the reduction in the assumption of oil prices for this year and the next.
“What happened is that the two factors just balanced each other out so the inflation outlook was maintained and, consequently, that was the major basis for the MB decision to hold the policy settings steady,” BSP Managing Director Francisco Dakila Jr. said.
Dakila also said that, amid the expected uptick in inflation due to the future implementation of the tax-reform package, the growth of consumer prices is “no way in danger”.
“So even though there might be some short term implications of the tax-reform program, it will not cause a breach in the inflation target band,” Dakila said.
The May 11 monetary-policy meeting was the penultimate monetary-policy meeting of Tetangco as BSP chief.
His last meeting as BSP governor will be on June 22. He is then scheduled to step down in July.
President Duterte earlier named Nestor A. Espenilla Jr., BSP deputy governor for the supervision and examination sector, as the next BSP chief.