Bangko Sentral Ng Pilipinas (BSP), which has now raised its policy rate by a total of 150 basis points this year, said the outlook for inflation for 2018 and 2019 had shifted upwards and the risks were still toward the upside while domestic demand has generally remained firm even as the monetary tightening works its way through the economy.
With supply forces expected to drive up inflation in coming months, inflation expectations remain elevated amid signs of second-round effects, the central bank said, adding:
"The Monetary Board, therefore, decided to raise the BSP policy interest rate anew to further anchor inflation expectations and to safeguard the inflation target over the policy horizon."
The rate hike was widely expected following the continued acceleration of inflation, a peso exchange rate that has hit record lows, and statements by the BSP's deputy governor, Diwa Guinigundo, earlier this week that the central bank would take "very strong" action today.
BSP said tighter monetary policy should help steer inflation toward its target by "reducing further risks to the inflation outlook, including those emanating from exchange rate volatility given the continued uncertainty in the external environment amid geopolitical tensions and the normalization of monetary policy in advanced economies."
Headline inflation in the Philippines rose for the 8th month in a row to 6.4 percent in August from 5.7 percent in July, well above its target range of 2.0 - 4.0 percent, around a 3.0 percent midpoint.
The peso rose slightly in response to BSP's rate hike to 54.19 per U.S. dollar but has fallen 7.7 percent since the start of the year.
Bangko Sentral Ng Pilipinas issued the following statement:
"At its meeting on monetary policy today, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 50 basis points to 4.5 percent, effective Friday, 28 September 2018. The interest rates on the overnight lending and deposit facilities were raised accordingly.
The Monetary Board recognized that a further tightening of monetary policy was warranted by persistent signs of sustained and broadening price pressures. Latest baseline forecasts have shifted higher for both 2018 and 2019, with risks to the outlook still leaning toward the upside. With supply-side forces expected to continue to drive inflation in the coming months, inflation expectations have remained elevated amid indications of second-round effects. Meanwhile, domestic demand conditions have generally held firm, even as the previous monetary policy responses continue to work their way through the economy.
The Monetary Board, therefore, decided to raise the BSP policy interest rate anew to further anchor inflation expectations and to safeguard the inflation target over the policy horizon. The Monetary Board believed that a tighter monetary policy stance will help steer inflation toward a target-consistent path over the medium term by reducing further risks to the inflation outlook, including those emanating from exchange rate volatility given the continued uncertainty in the external environment amid geopolitical tensions and the normalization of monetary policy in advanced economies.
At the same time, the Monetary Board emphasized the need for timely and appropriate non-monetary measures that will further mitigate the impact of supply-side factors on inflation, including rice tariffication.
The BSP reassures the public of its strong commitment to take all necessary policy actions to address the threat of high inflation and deliver on its primary mandate of price stability. "
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