​A third rate hike in August

PHILIPPINES - In Brief 25 Jul 2018 by Romeo Bernardo

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In a Q&A session with select analysts this afternoon, BSP Governor Nestor Espenilla told participants to expect "strong follow through" in monetary action on August 9, the next Monetary Board meeting. Asked what he meant by "strong", he replied "at least 25bps." Reasons given for the BSP’s increasingly hawkish posture include: (a) the need to take stronger policy action to anchor inflation expectations and temper second round effects of tax hikes, (b) even though supply factors continue to dominate, demand side pressures may have started to feed into inflation, and (c) exchange rate volatility is continuing and is affecting inflation expectations. The Governor added that the BSP has space to take strong action at this time given the economy's robust growth. On the reserve requirement ratio on deposits, the signal given is that after the 200bp cut this year (from 20% to 18% for commercial banks), the BSP will likely pause for now. However, the Governor said that he remains committed to bringing the RRR down to single digit over his term. The latest BSP view likely benefited from IMF inputs. In its end of mission report released today, the IMF team assessed that: "To strike the right balance between growth and macroeconomic stability, policies need to be adjusted to reduce inflationary pressures, while structural reforms should continue to support inclusive growth." Among the IMF's prescriptions are: (a) maintaining current fiscal deficit, "at around 2.4% of GDP", in 2018 and 2019; (b) further tightening monetary policy to anchor inflation expectations; (c) keeping exchange rate flexibility; and (d) safeguarding financial stability amid continued rapid credit growth and ...