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Interest rates now at 9-year high

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The Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) raised on Thursday the rate at which it borrows from or lends to banks by another 50 basis points to combat so-called second-round effects as the outlook on inflation remains elevated over the next 18 to 24 months.

This was the fierciest the monetary authorities have battled against inflation since 2009 when the BSP had to impose back-to-back interest rate adjustments at 50 basis points each to stop the inflation momentum dead in its tracks.

The seven-man MB did so again on Thursday with another back-to-back 50 basis point hike on the policy rates to arrest “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 BSP said.

It also said the decision was meant “to further anchor inflation expectations and to safeguard the inflation target over the policy horizon. The MB 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.”

But even as the collegial body endeavored to anchor inflation and inflation expectations, the BSP reiterated the need for “timely and appropriate non-monetary measures that will further mitigate the impact of supply-side factors on inflation, including rice tariffication.”

This relates in the main to supply restraints on the staple rice aggravated by weather disruptions that pushed headline inflation past the 4-percent ceiling this year to 6.4 percent as of August.

The BSP said the risk for still higher inflation is real, a prospect the BSP adknowledged when it said such risk still leans to the upside.

ING Bank economist Joey Cuyegkeng said the central bank has to anchor inflation expectations.

“With inflation remaining well-above their 2-4 percent target and clear and present signs of second round effects evident, the BSP looked to wield yet another 50 basis point rate hike to snuff out brewing concerns about prices pressures.

“The BSP hiked its policy rate to 4.5 percent, a move widely expected by the 20 out of 22 analysts surveyed by Bloomberg, as it continues to chase its inflation target for 2019. Price pressures persistently emanate from the supply side however the central bank has now vowed to reduce volatility in the exchange rate in order to help anchor inflation expectations.

Furthermore, so-called second round effects in the form of wage increases and transport fare adjustment have been implemented,” Cuyegkeng said.

At the Union Bank of the Philippines, its chief economist, Carlo Asuncion, said the hike was expected and should help the market see that the central bank is intensely aware of the market and the economic signals.

“It boosts confidence of the market knowing that the main banking regulator is fully aware of the risks and where the economy is really at,” Asuncion said.

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