Philippine Holding Rate Is Appropriate for Now, World Bank Says

The World Bank said the Philippines’ monetary policy stance is appropriate for now even as inflation is set to breach the central bank’s target this year.

“Keeping the interest rate flat for now is presently the most appropriate response,” Birgit Hansl, a World Bank economist in Manila, said in an emailed response to questions last week. “If inflationary pressures build rapidly and, most of all, if they persist over a few months, a rate adjustment would be appropriate — also given that there is ample domestic liquidity.”

Governor Nestor Espenilla has taken a cautious approach to monetary policy tightening, keeping the benchmark interest rate unchanged at 3 percent earlier this month even as he forecast inflation will exceed the 4 percent upper limit of the inflation target this year. Most economists in a Bloomberg survey forecast the central bank will start raising its key rate next month.

Bangko Sentral ng Pilipinas is waiting for signs that price pressures are becoming more entrenched before raising rates, the governor said this month.

Click to read: Philippines Holds Rate With 2018 Inflation Seen Breaching Target

“BSP is aware it must adjust its policy setting soon to avoid falling behind the curve,” said Emilio Neri, an economist at Bank of the Philippine Islands in Manila. “Markets could become less orderly if inflation in the coming months surprises on the upside and compels BSP to hike more aggressively.”

Weak Peso

The peso, which dropped to its lowest level since 2006 last week, has lost about 4 percent against the dollar this year, the worst performer after the Argentine peso among emerging markets.

READ ---  'Trumpflation' drives dollar for biggest weekly rise in 2017

A new tax law raised the cost of fuel, sugary drinks and cigarettes, putting pressure on inflation, which the central bank estimates will average 4.3 percent this year. Its target is to keep inflation at an average of 2 percent to 4 percent from 2018 to 2020. 

“There is a possibility that inflation may remain elevated around the upper bound of the inflation target,” Aekapol Chongvilaivan, an economist at the Asian Development Bank, said in an emailed reply to questions last week. Oil prices, the weak peso and strong economic growth may put pressure on prices, he said.

The impact of the tax law should be temporary, and “it’s not expected to drive inflation pressure for longer periods this year,” the World Bank’s Hansl said, echoing similar comments by central bank officials.

With economic growth exceeding 6 percent annually, among the world’s fastest, authorities must invest more to prevent price pressures building, she said.

“The Philippines economy is currently growing at potential growth, so there is a risk of overheating if new productive capacity is not being created through investment,” she said.

Click to read: Philippine Economy Expands More Than 6% for Sixth Year