BSP holds rates; inflation ‘manageable’

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Analysts expect rate hike in Q3

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Monetary authorities have revised the inflation outlook for this year downward to 3.4 percent from 3.5 percent previously, and to 3 percent from 3.1 percent for 2018, while keeping their policy settings unchanged.

“The Monetary Board’s decision is based on its assessment that the outlook for inflation remains manageable, consistent with favorable growth prospects,” BSP Governor Amando Tetangco Jr. told reporters after the policy meeting on Thursday.

The Monetary Board cited the beneficial impact on inflation of the removal of quantitative restrictions (QR) on rice importation in July.

In a press briefing, BSP Deputy Governor Diwa Guinigundo said the government decided to remove the quantitative restriction in favor of the 35 percent tariff under the Association of Southeast Asian Nations free trade agreement.

“If the tariff is going to be 35 percent, people expect that importation is going to be free – any entity, individual or cooperative can import rice from abroad. Whatever is collected from the tariffs form rice imports, will be refunded back to the agriculture sector to increase productivity, to establish farm-to-market roads, irrigation, etc,” he said.

It would be beneficial to the agriculture sector, translating into higher production. It should also be positive to inflation, the central bank official explained.

The balance of risks surrounding the inflation outlook continues to lean toward the upside, given the transitory impact of the proposed tax reform program, as well as possible adjustments in transportation fares and electricity rates, the Monetary Board said.

“It is possible. And we assume that the Congress will pass the tax reform package by the fourth quarter of 2017. In terms of the adjustment in excise tax on fuel of about P6.00, it will be staggered. So the impact on consumer price would be gradual,” Guinigundo said.

Within range

While the average inflation has risen to 3 percent in the first two months of the year because of increases in food and oil prices, as well as base effects, the latest forecasts continue to indicate that the inflation path will remain within the target range of 3 percent ± 1 percentage point for 2017 and 2018, the central bank said.

“Inflation expectations also remained anchored to the inflation target over the policy horizon,” Tetangco said.

The lingering uncertainty over the prospects of the global economy, due in part to possible shifts in macroeconomic policies in advanced economies, continues to pose a key downside risk to the inflation outlook, he added.

The board, however, emphasized that domestic economic activity is projected to stay firm, supported by buoyant household consumption and private investment, increased government spending and ample credit and liquidity.

“With these considerations, the Monetary Board believes that prevailing monetary policy settings remain appropriate,” Tetangco said.

“Looking ahead, the BSP will continue to monitor and assess evolving economic conditions to ensure price and financial stability conducive to sustainable economic growth,” he added.

During the policy meeting, the board decided to keep the reverse repurchase (RRP) facility rate at 3 percent.

The corresponding rates for overnight lending and deposit facilities also remain unchanged at 3.5 percent and 2.5 percent, respectively. The reserve requirement ratio was kept steady at 20 percent.

Analysts expect rate hike in Q3

In reaction, analysts said the BSP will be compelled to adjust policy rates in the third quarter of 2017.
ANZ Research said it expects the BSP to raise its rate corridor parameters with a cumulative 50 basis points (bps) this year.

“While inflation forecasts were marginally lowered for 2017 and 2018, risks are still tilted to the upside. Even as cost pressures are likely to subside in H2, demand-pull forces will persist. This will keep core inflation on an upward trend,” ANZ Research economist Eugenia Victorino said.

ING Bank chief economist for Asia Tim Condon is forecasting a couple of 25 bps policy rate hike—one in the third, the other in the fourth quarter. “Governor Tetangco steps down in early July and we think he’ll do so without raising rates,” Condon said.

IHS Markit Asia-Pacific chief economist Rajiv Biswas expect domestic demand and the upturn in CPI inflation in recent months likely to keep the BSP in a tightening bias, with a rate hike seen later this year.

Fitch-owned BMI Research sees the central bank being compelled to raise the benchmark rate by 50 bps to 3.50 percent before the year is out.

“We expect the BSP to tighten its monetary policy stance, as inflationary pressures rise, while it attempts to stem capital outflows amid an interest rate hike cycle in the US. Furthermore, strong economic growth momentum will provide the BSP sufficient room to hike rates,” it said.

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