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Philippines Monetary Policy November 2018

Philippines: Central Bank continues aggressive monetary tightening in November as inflation remains at a nine-year high

The Monetary Board of the Central Bank of the Philippines (BSP) raised the overnight reverse repurchase facility (RRP) at its 15 November meeting by 25 basis points to 4.75%. Correspondingly, the overnight deposit facility (ODF) and the overnight lending facility (OLF) rates were also raised by 25 basis points each and now stand at 4.25% and 5.25%, respectively. The ODF establishes the floor, whereas the OLF establishes the ceiling of the interest rate corridor system. November’s decision, which was in line with market expectations, represents the fifth consecutive rate hike by the Bank and the key policy rate now stands at its highest level in over nine years.

The Bank further tightened its monetary policy stance in the hope of containing runaway inflation. Inflationary pressures remain elevated despite previous monetary tightening, fueled by strong supply-side factors—primarily higher food and energy costs— and a robust domestic economy. Inflation remained at an over nine-year high of 6.7% in October, well above the upper bound of the Bank’s target range of 3.0% plus or minus 1.0 percentage point. In recent weeks the government has also taken measures to mitigate inflation, including a bill approved by the Senate on 14 November that will loosen rice import restrictions. Nevertheless, the Bank considered the rate hike as warranted and “deemed it necessary to respond with proactive policy action to help temper the risks to the inflation outlook”. Upside risks to the inflation outlook remain dominant, given the weaker peso, potential further effects from the Tax Reform for Acceleration and Inclusion (TRAIN) laws, and higher food prices and supply shortages caused by poor weather conditions. In its third quarter inflation report, the BSP penciled in above-target inflation in both 2018 and 2019.

The Bank struck a hawkish tone in its communiqué and reaffirmed its readiness to use appropriate measures to achieve price stability, although it toned down its rhetoric from the previous month. It is likely the Bank will take a wait-and-see approach at its next monetary policy meeting, assessing the impact of previous tightening and the effectiveness of the government’s policies to ease inflationary pressures before making its next move. Weaker economic growth in the third quarter could also give the Bank further reason to pause its cycle.

Commenting on their take on the Bank’s next move, analysts from FocusEconomics contributing panelist ING remarked:

“ING expects the BSP to stand pat given the decelerating trend seen in local inflation although the BSP may need to retain its hawkish stance to keep market guarded over possible rate hikes in the future with inflation still above target.”

The next monetary policy meeting will be held on 13 December.

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