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Economy

Philippine central bank chief slams 'behind the curve' claims

Governor says monetary policy hinged on inflation, not Fed

BSP Governor Nestor Espenilla says inflation targeting will continue to drive future monetary policy actions. (Photo by Mario Ignacio IV)

MANILA -- Future monetary policy actions will target inflation and not rely on the U.S. Federal Reserve for direction, Philippine central bank Gov. Nestor Espenilla told the Nikkei Asian Review on Monday. The governor defended its policy decision, with some market participants expecting the bank to follow the Fed's rate hike.  

In an interview, Espenilla also defended the Bangko Sentral ng Pilipinas' move on March 22 to keep its overnight lending rates unchanged at 3%. That same day, the Fed hiked its federal funds rate by 25 basis points, the first of at least three expected rate hikes in 2018.

The Philippine central bank expects inflation to stay within its 2-4% target range this year and next, based on a consumer price index reflecting 2012 prices. Inflation, however, will remain high for most of the year as President Rodrigo Duterte's tax reform program is expected to add up to a percentage point in headline numbers, Espenilla said.

"From an inflation targeting standpoint, these drivers are not expected to constantly stimulate inflation. In other words, they will have an impact but they will then dissipate," Espenilla said, noting cash transfers and subsidies have been released to counteract the inflationary impact of Duterte's tax plan.

The BSP has left benchmark rates untouched since 2014, except for an operational rate cut in 2016 when the central bank introduced an interest rate corridor system which began weekly auctions to mop up excess liquidity and align its benchmark rate closer to prevailing market rates.

Central bank watchers, such as those from Nomura Holdings and DBS Bank, have flagged BSP's reluctance in hiking policy rates, saying it has already fallen "behind the curve." The governor retaliated by saying they were "confused."

"They don't seem to understand what's driving it and that's what we are trying to explain," Espenilla said. "We have also explained that our monetary policy is really independently run and focused on domestic issues, rather than, let's say, being in lockstep with the Fed."

"So, the Fed raises, some seem to expect we should also raise our interest rates. That's normally true if we follow a fixed exchange rate policy, but we don't."

Earlier this month, the BSP cut reserve requirements of banks by one percentage point, unlocking 90 billion pesos ($1.7 billion) in idle funds for the financial system as it relies more on its weekly term deposit auctions in managing liquidity.

The BSP, he said, does not adjust rates based on short-term inflationary pressures.

"[We] also want to preserve the integrity of the inflation targeting framework which is a very clear articulation of what drives policy change.. That's an ultimate signal as well," Espenilla said. "So far, our track record, both meeting our targets and relatively forecasting accurately has been good. So, I guess we have earned the credibility of the marketplace."

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