MANILA: The Bangko Sentral ng Pilipinas (BSP) has given assurance that the country’s economic growth remains solid enough to absorb higher interest rates, if warranted, as inflation is seen peaking in the third quarter due to transitory effects of the tax reform law.
BSP Governor Nestor Espenilla Jr. told members of the Money Market Association of the Philippines (MART) last Friday that monetary authorities would stay alert to any signs of second-round effects and inflation becoming broader based.
“We stand firm in our intent to take immediate and appropriate measures to ensure that the monetary policy stance supports our price and financial stability objectives.
The central bank continued to adopt a dovish policy stance, keeping benchmark rates steady during its first two rate-setting meetings this year even if inflation kicked up to its highest level in more than three years at 4.5 percent in February from four percent in January.
This brought the average inflation at 4.2 percent in the first two months of the year, slightly above the two to four percent target set by the BSP for 2018 to 2020.
“Practicing vigilance, we at the BSP, note that inflation expectations have started to rise and will, therefore, need to be closely monitored in the coming months. Remaining watchful, we acknowledge that on balance, risks to the inflation outlook remain weighted toward the upside,” Espenilla said.
The BSP chief said decisions on the monetary policy stance would continue to be data-dependent.
“Focus will be on domestic conditions while taking into account external developments, only to the extent that these impact the domestic inflation outlook and financial conditions,” Espenilla added.
BSP Deputy Governor Diwa Guinigundo said inflation is expected to peak above the central bank’s two to four percent target by the third quarter before easing back starting in the fourth quarter and should settle within the target by 2019.
Based on the new series using the 2012 base year, the BSP’s Monetary Board sees inflation falling within the target over the next two years. Inflation is seen averaging 3.9 instead of 3.8 percent this year and to three, instead of 3.1 percent, next year.
However, inflation is seen accelerating to 4.5 instead of 4.3 percent this year before easing to 3.5 percent next year using the old series with a base year of 2006.
