Monetary authorities on Thursday decided to keep the central bank’s key interest rates unchanged, noting a favorable inflation outlook and minimal risks to growth during their last policy meeting for the year.
With the US Federal Reserve having announced its own rate hike earlier in the day, Bangko Sentral ng Pilipinas (BSP) officials said maintaining current policy settings would give them room to calibrate if needed.
Analysts said the central bank appeared in no hurry to raise rates and could continue its
accommodative stance next year.
“Latest baseline forecasts continue to indicate that inflation could settle below the target range of 3 percent plus or minus 1 percentage point for 2015,” central bank Governor Amando Tetangco Jr. said following the meeting of the BSP’s policy-making Monetary Board.
The rise in consumer prices has fallen below the central bank’s 2 percent to 4 percent target, but picked up to 1.1 percent last month from a record low of 0.4 percent.
Monetary authorities kept the 2015 inflation forecast at 1.4 percent, the current year-to-date average.
“However, inflation is seen to return gradually to a path consistent with the inflation target for 2016-2017, as the effects of recent weather disturbances continue to be felt,” Tetangco said.
For 2016, the Monetary Board adjusted its inflation forecast to 2.4 percent from 2.3 percent and raised this further to 3.2 percent from 2.9 percent for 2017.
The central bank’s overnight borrowing and lending rates were kept at 4 percent and 6 percent, respectively. The special deposit account (SDA) rate was also held steady at 2.5 percent, while the reserve requirement ratio for banks still stands at 20 percent.
Central bank Deputy Governor Diwa Guinigundo said the revised 2016 inflation forecast was based on the higher November reading; the impact of a weakening peso, which could impose some pressures on inflation moving forward; and weather-related price adjustments for some key food commodities.
Tetangco said inflation expectations remained anchored within the target band for 2016 and 2017.
Upside pressures could come from the impact of El Niño dry weather conditions on food prices and utility rates as well as pending petitions for power rate adjustments, while downside risks could arise from slower-than-expected global economic activity.
The Monetary Board also observed that domestic demand conditions were likely to stay firm, supported by solid household and capital spending, buoyant market sentiment and adequate domestic liquidity.
Tetangco said the Monetary Board considered the likely impact of the Fed rate hike and noted that “keeping monetary policy settings steady at this juncture would allow the BSP some room to continue to assess evolving global economic conditions and calibrate its policy tools as appropriate.”
“Given these considerations, the Monetary Board believes that prevailing monetary policy settings are appropriate given the outlook for inflation and domestic economic activity,” he said.
Tetangco reiterated that the central bank would continue to monitor domestic and external developments to ensure that the monetary policy stance remains in line with price and financial stability.
After the announcement of Thursday’s decision, private analysts said key rates would likely remain unchanged for 2016.
“Even with inflation being below its target band, BSP appears comfortable with its policy stance, flagging that growth and inflation risks largely stem from poor weather and the global backdrop,” said Rahul Bajoria, economist at United Kingdom-based bank Barclays.
Bajoria said he expected the next policy move to be a rate hike, but with 2016 growth likely to show no improvement from this year the adjustment will only come in the second quarter of 2017.
The hike is also only likely to materialize if growth has recovered sufficiently and inflation is high enough to justify an increase in interest rates, he added.
“Although there is external uncertainty in the form of the Fed rate hike cycle, we think the Philippines’ strong external position and low level of short-term debt provide the BSP with enough policy space to maintain an accommodative stance even with rates US heading higher,” Bajoria said.
London-based think tank Capital Economics said there was little chance that the BSP would soon follow the Fed in hiking interest rates.
“Looking ahead, with growth picking up, but inflation set to remain low, the central bank is unlikely to be in any hurry to adjust interest rates,” said Capital Economic’s Daniel Martin.
“Even as the Fed’s tightening cycle gathers pace next year, we doubt the BSP feel any pressure to follow suit,” he added.