Angelo Taningco
Economist, Treasury Group

The BSP’s Monetary Board decided yesterday to raise the policy rate by 50bps to 4.00%, consistent with market consensus, and signaled a hawkish stance. Overnight deposit and lending rates were likewise increased accordingly, to 3.50% and 4.50%, respectively. The central bank also adjusted up its inflation forecasts by 0.4pp to 4.9% and 3.7% for 2018 and 2019, respectively. It also introduced its 2020 inflation forecast, which is set at 3.2%.

Similarly, we revised up our inflation forecasts by 0.3pp to 5.0% for 2018 and 0.7pp to 4.0% for 2019. First-half (H1) inflation has averaged 4.3%, and we now project second-half (H2) inflation this year to be much higher at 5.7%, which coincides with the July inflation rate. The monetary policy statement took note of the central bank’s “strong commitment and readiness” to initiate necessary policies to curb high inflation and ensure price stability. BSP Governor Nestor Espenilla said that the central bank is not closing its door for another rate hike this year, as it expects inflation to peak in the third quarter (Q3).  We think inflation will reach its highest monthly level in August, to drift closer to 6%. Against this backdrop, we now expect another rate hike this year, and it’s likely to be 25bps and initiated as early as in the next Monetary Board meeting scheduled on 27 Sep.

The latest monetary policy decision was made in connection with the Monetary Board’s assessment that upside risks to the inflation outlook are still dominant and inflation expectations still elevated. Moreover, there is now a sense that the government’s inflation target may again be exceeded next year. Our latest forecasts indicate H1 2019 inflation to remain above the target range at 4.4% and to drift within the range in H2 2019.

Figure: Inflation and Policy Rate

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