• BSP cuts inflation forecast, keeps key rates


    Monetary authorities decided to keep key interest rates unchanged at their fourth policy meeting for the year on Thursday, as domestic economy continues to remain firm.

    An analyst said the central bank’s decision not to change the benchmark rates came as no surprise and it may continue to maintain them until the end of 2017.

    In addition, the Bangko Sentral ng Pilipinas (BSP) lowered its inflation forecast for the year to 2 percent from 2.1 percent. It said forecast for 2017 was kept at 3.1 percent before easing to 2.6 percent in 2018.

    The reverse repurchase (RRP) facility rate remained at 3.0 percent. The BSP also held corresponding rates on the overnight lending and deposit facilities were also kept steady at 3.5 percent and 2.5 percent, respectively. The reserve requirement ratios were also left unchanged at 20 percent.

    To recall, the central bank on May 16, cut its headline rate to 3 percent from the current 4 percent as part of its shift to the Interest Rate Corridor (IRC) system on June 3.

    “The Monetary Board’s decision is based on its assessment that the inflation environment continues to be manageable,” BSP Deputy Governor and Officer in Charge Nestor Espenilla Jr. said following the policy meeting.

    Latest forecasts indicate that average inflation is likely to settle near the lower edge of the 3 percent plus or minus 1 percentage point target range in 2016 and rise toward the mid-point of the target range in 2017 and 2018, he said.

    “The overall balance of risks surrounding the inflation outlook is now deemed to be broadly balanced,” Espenilla said.

    With global oil prices recovering, the risk of second-round effects from lower oil prices is likely to recede in the period ahead, he added.

    Nevertheless, slower global economic activity remains a key downside risk to the inflation outlook.

    Espenilla said given improved rainfall conditions and the shift to neutral weather conditions in the May to July period, the upside risks to food and utility prices due to El Niño are also seen to recede in the coming months.

    However, pending petitions for adjustments in electricity rates remain an upside risk to inflation.

    “Meanwhile, inflation expectations remain broadly consistent with the inflation target over the policy horizon,” he said.

    Lower 2016 inflation
    Explaining the reason for the lower BSP inflation forecast for 2016, Deputy Governor Diwa Guinigundo said the central bank considered the recently approved adjustment in the minimum wage in its projection.

    “The minimum wage adjustment of P10 implemented in the early part of June 2016 is lower than what was expected, P27 for July of 2016,” he said.

    “Of course we are also looking at the possible strengthening of the peso in the first six months of 2016,” he added.

    Espenilla said at the same time, the Monetary Board also observed that prospects for global economic growth have remained subdued since the previous meeting, with increased downside risks to global activity.

    On the other hand, he said domestic economic activity continues to be firm, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity.

    Higher fiscal spending is also expected to further boost domestic demand.

    “On balance, therefore, the sum of recent new information, particularly on the emerging outlook for inflation and demand conditions, continues to support keeping monetary policy unchanged,” he added.

    Steady rates until 2017
    “With the economy growing strongly but inflationary pressures under control, today’s decision by the central bank in the Philippines (BSP) to keep its main policy rate on hold at 3 percent came as no surprise. Looking ahead, we think the central bank will be in little hurry to adjust interest rates,” Gareth Leather, senior Asia economist for London-based research consultancy firm Capital Economics.

    There is little sign that strong growth is feeding through into an increase in price pressures, he said.

    With this, Capital Economics continues to think that the policy rate will remain unchanged at 3 percent not just until the end of 2016, but to the end of 2017 as well, Leather said.


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