December 3, 2018

At its meeting on monetary policy, the Monetary Board decided to increase the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points to 4.75 percent, effective Friday, 16 November 2018. The interest rates on the deposit facilities and overnight lending were raised accordingly.

The newest inflation forecasts seem to show inflation settling within the target band of 3.0 percent ± 1.0 percentage point in both 2019 and 2020. After considering the impact of non-monetary measures, including the rice tariff cation bill and the suspension of the oil excise tax, the monetary board decided to raise the policy rate by 25 basis points given the upside risks to the inflation estimate and considering that inflation expectations have remained elevated as supply-side, and possible wage pressures continue to drive price developments.

The monetary board, at the same time, believes that prospects for the domestic economy remain generally favourable and allow some scope for a measured adjustment in the policy rate to control inflation expectations and preempt further second-round effects.

The board considered it very important to respond with proactive policy action to help temper the risks to the inflation outlook, including those emanating from the continued uncertainty in the external environment amid tighter global financial conditions and trade tensions among major economies.

Nevertheless, the monetary board continues to emphasize the need for non-monetary follow-through measures to mitigate the impact of supply-side factors on inflation.

The BSP is prepared to take appropriate policy actions as needed to ensure the achievement of its price and financial stability objectives.

It should be a little more expensive to purchase anything on credit or pay for services and goods even with cash given the decision by the Bangko Sentral ng Pilipinas to hike the rate at which it borrows from or lends to banks by another 25 basis points.

The decision brings the central bank’s borrowing rate to 4.75 percent and its lending rate to 5.25 percent and, according to the monetary authorities, enough to anchor inflation and inflation expectations that have been upset by supply-side restraints in recent months.

The various banks are expected to recalibrate their lending rates as a result of the adjustments.

The decision considered local output growth has averaged 6.1 percent in the third quarter and the likelihood for the US Fed, still the world’s most influential central bank, to hold against any more tightening in its interest rate structure.

The decision also came with forecast inflation having also been recalibrated higher to 5.3 percent this year from 5.2 percent and next year’s forecast inflation to 3.5 percent from only 3.4 percent.

Forecast inflation for 2020 was similarly adjusted higher to 3.3 percent from 3.2 percent.

This and other adjustments considered that while the policy rates — and by extension commercial interest rates — were to move up as a consequence, local output growth should not be unduly affected. The expectation was for domestic output growth to remain within the trend.

That trend recognizes that while GDP growth has somewhat slowed from 6.7 percent in the first quarter to 6.2 percent in the second quarter and finally to 6.1 percent in the third, the economic managers remain “cautiously optimistic” on the continued expansion of the economy.

The policy rate hike was designed to “safeguard price stability” which is the mandate of the Bangko Sentral.

The decision took into consideration the passage of the rice tarification measure in the houses of Congress late Wednesday and paved the way for the lifting of the ceiling on imported rice.

Supply-driven restraints have driven the cost of food significantly higher since late last year, particularly on rice.

Also, according to the BSP, the recalibration of the policy rates should not impact on domestic credit activities, based on the latest data showing bank lending growing at a healthy pace of 17.4 percent in September.

The continued credit growth is a validation of the recent adjustments in the policy rates is “consistent with the continued growth of the economy.

The Monetary Board is of the belief that prospects for the domestic economy remain generally favourable and allow some scope for a measured adjustment in the policy rate to rein in inflation expectations and preempt further second-round effects.

The Monetary Board continues to emphasize the need for non-monetary follow-through measures to mitigate the impact of supply-side factors on inflation.