Bangko Sentral considering 'strong monetary action' to tame price pressures

Reuters

Posted at Jul 20 2018 03:37 PM

Bangko Sentral ng Pilipinas Governor Nestor Espenilla. Jonathan Cellona, ABS-CBN News/File

MANILA -- The Philippine central bank is considering "strong monetary action" at its meeting next month to tame inflation and foreign exchange volatility, its governor said on Friday, signalling a third interest rate rise this year.

Inflation rose to 5.2 percent in June, the highest level in more than 5 years and above the central bank's 2-4 percent target rate. Its expected to quicken in July to 5.3 percent due to higher food, fuel and utility costs, Department of Finance chief economist Gil Beltran said.

At the same time, the peso is hovering near a 12-year low against the dollar and is one of the worst performing currencies in Asia.

"The Monetary Board is considering strong monetary action to deal with persistent elevated inflation risks as well as our concern on the volatility in the foreign exchange market", Bangko Sentral ng Pilipinas Governor Nestor Espenilla told reporters.

The central bank's next scheduled meeting is on August 9, the same day that the government is due to release second-quarter GDP figures and 2 days after July inflation data is scheduled for publication.

Espenilla said the peso's weakness is contributing to higher inflation expectations and "developments that may disanchor those expectations warrant a strong response."

The currency has weakened in recent years as US interest rates started to rise and more recently as global trade tensions mounted.

The BSP raised interest rates last month for the second time in 6 weeks, becoming the second central bank regionally after Indonesia's to deliver two increases in a short period of time.

Like other Asian economies with external deficits, the Philippines faces pressure to follow the US Federal Reserve in shifting away from low interest rate settings or risk capital flight as investors seek higher-yielding assets

The Philippines' key rate, after two hikes of 25 basis points each, is 3.50 percent.

HSBC Economist Noelan Arbis said in a market note he expects the central bank to respond more forcefully next month, with a 50 basis points rate increase to tame inflation.