BSP freezes rates, cuts inflation forecast to 2.2%

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The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) decided to hold its key interest rates steady on Thursday, but revised downward its inflation forecast for 2015.

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The BSP now projects inflation for full-year 2015 at 2.2 percent, down from a previous forecast of 2.3 percent. For 2016, it retained the forecast at 2.5 percent.

Benchmark rates unchanged
For its key policy stance, the BSP kept the rate for overnight borrowing, or reverse repurchase (RRP) facility at 4 percent, while that for overnight lending or repurchase facility stays at 6 percent.

The special deposit account (SDA) rate was also frozen at 2.50 percent, while the reserve requirement ratio (RRR) for banks still stands at 20 percent.

“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 (OIC) Diwa Guinigundo told reporters in a press briefing following the Monetary Board meeting.

Guinigundo said that at the same time, the Monetary Board observed that domestic demand conditions remain robust, owing to solid private demand, adequate domestic liquidity, and buoyant business sentiment.

Higher public spending is also expected to support economic activity, he said.

“Given these considerations, the Monetary Board is of the view that current monetary policy settings remain appropriate. Going forward, the BSP will continue to monitor domestic and external developments affecting the inflation outlook to ensure that the monetary policy stance remains consistent with its price and financial stability objectives,” Guinigundo added.

Improved inflation outlook
Guinigundo views the latest baseline forecasts as indicative of the likelihood that inflation will settle within the lower half of the 2 percent to 4 percent range for both 2015 and 2016.

Inflation expectations remain with the target band over the policy horizon, he said, adding that the central bank had considered the P15 upward adjustment to the minimum wage in Metro Manila in its projection for 2015 and 2016.

“The risks to the inflation outlook continue to be broadly balanced, with upside risks emanating from pending petitions for adjustments in utility rates and possible shortages [of electricity],” he noted.

“Meanwhile, global economic activity has turned slightly more positive but continues to be uneven, which could further mitigate upward pressures on commodity prices,” Guinigundo added.

HSBC sees ample liquidity
Trihn Nguyen, economist at banking giant HSBC, agrees with the central bank’s views on the economy and the inflation environment.

The HSBC economist noted that Philippine economic growth remains solid while inflation is well within the BSP’s 2 percent to 4 percent target range.

“More fundamentally, the banking system is awash with liquidity, giving little impetus for the BSP to move to support the economy,” she said.

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