BSP need not take cue from Fed

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said they do not need to mirror key rate adjustments by the Federal Reserve or other central banks given the intrinsic environment in every economy.

In the Philippines, inflation rate has been rising, with the February 2018 level up at 3.9 percent (based on new base year of 2012) from the previous month’s 3.4 percent.

Based on the previous base year, 2006, inflation rose to 4.5 percent from 4 percent last January.

The latest inflation level using the rebased year is already near the top end of the government’s 2 to 4 percent inflation target for 2017-19 while using the previous base year inflation already exceeded the target range.

Thus, investors and analysts alike forecast the BSP to increase key rates as early as March this year to address any inflationary impact of the faster rate of price increases.

However, Espenilla said they have been telling the public that “yes, we recognize that the inflation has accelerated but we also said that we analyze the understanding drivers behind the higher inflation.”
“And we think that they (inflation drivers) are transitory. And based on our two-year projection we expect it to come back down. So that’s where we are coming from in terms of the manageability of the situation,” he said.
Philippine monetary officials expect inflation to normalize starting March 2019.
The central bank chief said BSP officials “would take a very different view if, in our view, inflation will accelerate further, let’s say in 2019.”
He, however, pointed out that “that’s not the case right now in so far as the data is concerned.”
“And so that remains a core view of the BSP,” he said, although citing that “nonetheless, as we said, we continue to review the data as it comes along.”
With the continued rise in domestic inflation rate, the BSP is expected to hike rates although not as much as the expectations for the Federal Reserve to increase key rates by around four times this year.
Espenilla, however, stressed that people should understand that the Fed has a “looser position than where we are” in terms of policy stance vis-a-vis the inflation outlook.
“So why must we follow rate hike one-for-one when we are in different starting point. And our economy is growing much faster,” he said.
The central bank chief said the policy rate driver in the Philippines is the “assessment of the domestic economic conditions.”
This, he said, is “also one reason why, as part of the policy set, we allow exchange rate flexibility.”
He said the BSP is “not married to the idea that the peso is of this value, come hell or high water it must stand at this value.”