BSP holds key rates but hikes inflation forecasts

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Key interest rates were kept unchanged on Thursday but monetary authorities raised their inflation forecasts for this year up to 2019 year given price pressures.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla (left) and Diwa Guinigundo, Deputy Governor,ODC,MSS Bangko Sentral ng Pilipinas answer questions from the media during the Monetary Policy presconference at the Bangko Sentral building roxas blvd. PHOTO BY BOB DUNGO JR.

Rates for the Bangko Sentral ng Pilipinas’ overnight reverse repurchase, overnight lending and overnight deposit facilities were retained at 3 percent, 3.5 percent and 2.5 percent, respectively.

Reserve requirement ratios were likewise kept at 20 percent.

“The Monetary Board’s decision is based on its assessment that the outlook for inflation environment remains manageable,” Bangko Sentral Governor Nestor Espenilla Jr. told reporters after a Monetary Board policy meeting, his first as central bank chief.


The inflation forecast for the year, however, was raised to 3.2 percent from the previous 3.1 percent. Estimates for 2018 and 2019 were also revised to 3.2 percent and 3.1 percent from 3 percent.

Central bank Deputy Governor Diwa Guinigundo noted higher oil prices, increased domestic liquidity and a weaker peso.

“We note that in the last meeting of the Board, the oil prices that we assumed were the following: $49.49 per barrel for 2017, $48.78 per barrel for 2018 and finally $49.54 per barrel for 2019. For this meeting, the rest of the petroleum prices is now $50.48 per barrel for 2017, $50.32 per barrel for 2018 and $51.36 per barrel for 2019,” Guinigundo said.

He said liquidity had risen on account of the economy’s continuing expansion and an increase in domestic credit.

“Finally, the exchange rate also is expected to continue to show some depreciation on account of the continuing expansion of domestic activity, which would require more imports of capital goods, raw materials, and intermediate products,” Guinigundo said.

Espenilla said that while inflation forecasts had risen, the future path remained within the targeted 2 to 4 percent.
“[I]nflation expectations … remain firmly anchored close to the midpoint of the government’s 3 percent ± 1 percentage point target over the policy horizon,” he said.

The Monetary Board recognized that the balance of risks to the inflation outlook remained on the upside.

Espenilla said that while the proposed tax reform program could exert pressure on prices, social safety nets and expected improvements in productivity would likely temper the impact over the medium term.

The central bank officials said the Monetary Board was continuing to pay close attention to evolving economic growth and liquidity conditions and their implications on price and financial stability.

Australia’s ANZ Research, meanwhile, said it expected the BSP to commence hiking rates before the end of the year.

“We agree with the central bank that risks to future inflation remain tilted to the upside,” it added.

ANZ Research said headline inflation had already topped off and would likely remain anchored to target this year. The knock-on effects of tax reforms on consumer prices, however, are significant.

“Combined with solid domestic demand, the 2 percent to 4 percent target range may be at risk depending on when the tax reform will be implemented,” it added.

“We still expect rate tightening to commence before the end of the year, starting with 25bps hikes in the interest rate corridor in the fourth quarter.”

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