* Price risks from US, Europe, Japan economies
* Shifts in risk appetite that impact financial markets
* Geopolitical risks that can affect commodity prices
* Domestic liquidity in the financial system
The central bank strikes a hawkish stance over price risks to the Philippines’ inflation outlook from external and domestic sources, poised to defend price stability at any sign of threat without signaling which monetary policy tool it will deploy next.
Analysts are left guessing on the best bets after the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) over the last three consecutive policy meetings made adjustments to two of its policy levers to curb growth in money supply as a means to tame inflation and maintain stability in the financial system.
The BSP has twice raised the reserve requirement ratio (RRR) for banks and just last month increased its Special Deposit Accounts (SDA) rate by 25 basis points.
“What we are doing in the Bangko Sentral is to monitor both the domestic and global developments and assess how they could likely affect the inflation outlook and financial stability,” BSP Governor Amando Tetangco Jr. told reporters on Wednesday.
Among the external developments the central bank continues to follow are the economic performance of the advanced economies, particularly the United States, as well as Europe and Japan, he said on the sidelines of the 2014 Awards Ceremony for BSP Stakeholders held at the BSP Complex in Manila.
“We are also looking at the shifts in risk appetite that can impact financial markets and geopolitical risks that can affect commodity prices,” he said, without offering specific examples. Markets have been unsettled in recent weeks due to the ongoing conflict in the Ukraine, and an offensive by Islamic extremists in Iraq, the world’s fourth-largest oil producer.
On the domestic side, Tetangco noted the central bank’s continued focus on financial system liquidity and domestic financial markets, in particular the foreign exchange and bond markets, and how these factors could be affected by developments overseas.
Nevertheless, the BSP governor stressed that the main area of focus for the central bank continues to be inflation outlook.
Full-year forecast raised
Tetangco added that to date, the BSP’s forecast for average inflation for the year is within the 3 percent to 5 percent range, or at above the midpoint. Shortly after the announcement of May’s 4.5 inflation rate, the BSP adjusted its specific full-year forecast upward from 4.3 to 4.4 percent.
“We saw some deceleration in the June inflation rate to 4.4 percent from 4.5 percent in May. So we will continue to assess whether this is something that will continue or will there be some ups and downs in inflation rate for the rest of the year,” he said.
“We are not committed to have pre-set policy. We continue to monitor and see if [the deceleration of inflation rate]is going to materially alter the inflation forecast that we have,” he said.
Speculation on overnight lending
“We will not hesitate to adjust our policy settings, the stance of monetary policy” if necessary, Tetangco added.
Earlier this week, economists at Standard Chartered Bank, HSBC, and Bank of the Philippine Islands all forecast BSP adjustments at its upcoming policy meetings. The leading banks were in agreement that an increase in the benchmark reverse repurchase (overnight lending) rate by the BSP was likely, although they differed on what other steps the central bank might take, such as adjusting the interest rate of Special Deposit Accounts (SDA) or increasing banks’ reserve requirements.
The Monetary Board of the BSP is set to announce its latest monetary policy stance after its meeting on July 31.
The Board over the last three consecutive monetary policy meetings has made adjustments to two of its policy levers to curb growth in money supply as a means to tame inflation and maintain stability in the financial system.
The policy making body decided at its March 27 meeting to raise the RRR for banks to 19 percent, then further to 20 percent at its May 8 meeting in a bid to siphon off excess liquidity from the financial system.
On June 19, the Board kept its key overnight lending and borrowing rates unchanged but increased the rate on the SDA facility by 25 basis points to 2.25 percent.