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Central bank unfazed by pace of price pickup

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Diwa C. Guinigundo
‘While there are pressures to raise interest rates, our careful assessment of the data and facts does not point to immediate rate hikes.’ -- Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Guinigundo

THERE IS STILL NO NEED to raise policy rates in the Philippines despite rising inflation pressures, a senior central bank official said, noting that calls for a rate hike bare a “myopic” view of the economy.

In a four-page commentary, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo sought to allay concerns that the central bank is running monetary policy too loose as it has kept interest rates within the 2.5-3.5% range since mid-2016, despite rising global yields and with inflation on the rise.

A number of analysts have been flagging the need for the BSP to raise rates since last year, saying this move is needed to keep local yields competitive. Among the reasons cited are elevated inflation — with expectations that the pace will quicken in the coming months — as well as the gradual rate increases in the United States.

“While these concerns are relatively valid, the BSP believes that these developments — along with other ignored but equally important facts — continue to validate the current monetary policy stance,” Mr. Guinigundo said over the weekend.

“While there are pressures to raise interest rates, our careful assessment of the data and facts does not point to immediate rate hikes.”

The BSP kept policy interest rates steady on Thursday last week despite the US Federal Reserve’s tightening bias and inflation pressures intensifying at home especially due to higher taxes as a result of tax reform that took effect in January.

Mr. Guinigundo said the central bank is keeping an eye on liquidity and other financial conditions, even as there is no urgent need to tweak benchmark borrowing rates for now.

Inflation averaged 3.7% for the first two months of 2018, with the BSP seeing a steady ascent towards a peak in July-September. The full-year pace is expected at 3.9% under the 2012 base year, still within the 2-4% target range which the central bank had set using the old 2006-based consumer price index.

“While some market indications point to rising inflation expectations, nothing at this point suggests that the market expects persistent significant surge in consumer prices through 2019 that would warrant a change in the monetary policy stance,” the central bank official added.

He also stood firm that the BSP charts its own course in terms of monetary policy, and does not have to match the Fed’s tightening moves.

The Fed raised rates by another 25 basis points last month, but this was followed by a status quo decision from the local central bank.

“In practice, these trade-offs imply that monetary policy has real and significant economic costs,” Mr. Guinigundo said.

“On one hand, when a central bank raises interest rates prematurely, it runs the risk of the economy slowing down. On the other hand, when the central bank raises interest rates too late, it could… fuel inflationary pressures leading to overheating.”

However, he pointed out that the BSP does not discount the need for higher interest rates should domestic conditions change and “targets may be compromised.” — Melissa Luz T. Lopez