Moody’s cites need for tighter monetary policy

To Temper Outflows, Boost Peso

MANILA, Philippines — The tighter monetary stance adopted by the Bangko Sentral ng Pilipinas (BSP) may temper capital outflows as well as prop up the value of the peso against the dollar, according to global credit rating agency Moody’s Investors Service.

“A tighter monetary policy will serve to temper capital outflows, peso depreciation and, hence, inflation,” Moody’s said in a report.

Moody’s said the BSP has built up a track record of maintaining monetary and financial stability notwithstanding the spike in inflation this year.

Inflation is expected to rise further to a range of 5.1 to 5.8 percent in July from a five-year high of 5.2 percent in June due to higher utility rates and oil prices, as well as more expensive food prices.

While a sustained rise in inflation could exacerbate upward pressure on market interest rates and capital outflows, and downward pressure on the exchange rate, Moody’s said the rise in inflation is temporary and would fall to within the BSP’s target band of two to four percent in 2019.

The debt watcher said the proposed rice tariffication bill that aims to replace the system of quotas for rice imports with one using tariffs would alleviate the local supply-demand imbalance that has led to rapid increase in rice prices.

“In the context of volatile capital flows, the central bank has proactively managed liquidity through the more active calibration of the use of reserve requirements and market-based facilities, such as the term deposit facility,” Moody’s said.

The rating agency said the BSP has also exhibited considerable exchange rate flexibility as it has maintained stable foreign currency reserves, while the deterioration in the current account from a wide surplus to a small deficit has driven peso depreciation.

Meanwhile, Espenilla reiterated the BSP’s commitment for a strong follow-through monetary adjustment at the rate-setting meeting of the Monetary Board on Aug. 9.

“Domestic liquidity continues to expand to meet the needs of the economy even as we have demonstrated our resolve to tighten monetary policy whenever the situation calls for it. In the face of rising threats to the inflation target, we hiked policy rates last May and June. We are ready to follow-through to secure our inflation target,” he said.