AFTER three consecutive rate hikes—with the latest policy action being the

strongest from the Central Bank in over a decade, economists believe the Bangko
Sentral ng Pilipinas (BSP) is not done yet in trying to cure the rising inflation in
the economy.

With inflation expected by the BSP to hit 4.9 percent for this year and 3.7 percent
for next year, economists agree that the BSP will likely make one more 25-basis-
point rate hike before this year ends.

Economists from ING Bank Manila, J.P. Morgan Chase & Co. and Fitch
Solutions agreed that tightening is likely to continue in the fourth quarter of the
year, with inflation remaining elevated up until 2019.

ING Bank Manila economist Joey Cuyegkeng said he expects another 25-basis-
point rate hike in the fourth quarter of the year and another 50-basis- point hike in
2019.

“The seven-month inflation average is only 4.5 percent. The BSP’s inflation
forecast for 2018 implies that inflation will still peak in the coming months and
that inflation could average 5.5 percent in the next five months,” Cuyegkeng said.

“With the peak of inflation still ahead, inflation expectations are unlikely
to stabilize anytime soon. Further monetary tightening would be needed to ensure
that such expectations become well-anchored,” he added.

J.P. Morgan economist Benjamin Shatil was also of the view that they are looking
for another 25-basis- point hike in the fourth quarter of the year, with the
possibility that this could come earlier “should price pressures remain elevated
against the baseline expectation of some moderation.”

“The ongoing combination of firm demand, broadening price pressures and

thinning external buffers suggests the potential for further monetary-policy
tightening this year. We look for another 25-basis-point hike in the fourth quarter
of the year,” Shatil said.
“In this context, the CPI inflation data will be key in guiding the policy outlook
over the next several months,” the economist added.

Fitch Solutions—the research arm of the Fitch Group—further said the local
economic growth, despite slumping to 6 percent in the second quarter of the year,
is still strong enough to absorb another rate hike for the year.

“Given that the Central Bank maintained its hawkish tone in spite of the lackluster
economic performance, stating that ‘favorable conditions arising from sustained
domestic growth also suggest that the economy can accommodate a further
tightening of monetary- policy settings,’ we have revised our forecast for the
Central Bank to tighten its policy rate by a further 25 basis points to 4.25 percent
before end-2018,” Fitch Solutions said.

The BSP is expected to meet again on September 27 for its sixth monetary-policy
meeting for the year.

At its meeting on monetary policy today, the Monetary Board decided to raise the interest rate on
the BSP’s overnight reverse repurchase (RRP) facility by 50 basis points to 4.5 percent, effective
Friday, 28 September 2018. The interest rates on the overnight lending and deposit facilities were
raised accordingly.

The Monetary Board recognized that a further tightening of monetary policy was warranted by
persistent signs of sustained and broadening price pressures. Latest baseline forecasts have
shifted higher for both 2018 and 2019, with risks to the outlook still leaning toward the upside.
With supply-side forces expected to continue to drive inflation in the coming months, inflation
expectations have remained elevated amid indications of second-round effects. Meanwhile,
domestic demand conditions have generally held firm, even as the previous monetary policy
responses continue to work their way through the economy.

The Monetary Board, therefore, decided to raise the BSP policy interest rate anew to further
anchor inflation expectations and to safeguard the inflation target over the policy horizon. The
Monetary Board believed that a tighter monetary policy stance will help steer inflation toward a
target-consistent path over the medium term by reducing further risks to the inflation outlook,
including those emanating from exchange rate volatility given the continued uncertainty in the
external environment amid geopolitical tensions and the normalization of monetary policy in
advanced economies.

At the same time, the Monetary Board emphasized the need for timely and appropriate non-
monetary measures that will further mitigate the impact of supply-side factors on inflation,
including rice tariffication.
The BSP reassures the public of its strong commitment to take all necessary policy actions to
address the threat of high inflation and deliver on its primary mandate of price stability.

:
Inflation occurs when an economy grows due to increased spending. When this
happens, prices rise and the currency within the economy is worth less than it
was before; the currency essentially won’t buy as much as it would before. When
a currency is worth less, its exchange rate weakens when compared to other
currencies.

There are many methods used to control inflation; some work well while others
may have damaging effects. For example, controlling inflation through wage
and price controls can cause a recession and cause job losses.

Contractionary Monetary Policy

One popular method of controlling inflation is through a contractionary monetary
policy. The goal of a contractionary policy is to reduce the money supply within
an economy by decreasing bond prices and increasing interest rates. This helps
reduce spending because when there is less money to go around, those who
have money want to keep it and save it, instead of spending it. It also means that
there is less available credit, which can also reduces spending. Reducing
spending is important during inflation, because it helps halt economic growth
and, in turn, the rate of inflation.

There are three main tools to carry out a contractionary policy. The first is to
increase interest rates through the central bank, in the case of the U.S., that's
the Federal Reserve. The Fed Funds Rate is the rate at which banks borrow
money from the government, but, in order to make money, they must lend it at
higher rates. So, when the Federal Reserve increases its interest rate, banks
have no choice but to increase their rates as well. When banks increase their
rates, fewer people want to borrow money because it costs more to do so
while that money accrues at a higher interest. So, spending drops, prices drop
and inflation slows.

Reserve Requirments
The second tool is to increase reserve requirements on the amount of money
banks are legally required to keep on hand to cover withdrawals. The more
money banks are required to hold back, the less they have to lend to consumers.
If they have less to lend, consumers will borrow less, which will decrease
spending.
Reducing the Money Supply
The third method is to directly or indirectly reduce the money supply by enacting
policies that encourage reduction of the money supply. Two examples of this
include calling in debts that are owed to the government and increasing the
interest paid on bonds so that more investors will buy them. The latter policy
raises the exchange rate of the currency due to higher demand and, in turn,
increases imports and decreases exports. Both of these policies will reduce the
amount of money in circulation because the money will be going from banks,
companies and investors pockets and into the government’s pocket where it can
control what happens to it.

Read more: What methods can the government use to control inflation? |
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