BSP keeps key rates, cuts inflation outlook

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THE Philippine central bank decided on Thursday to keep its key interest rates unchanged, but adjusted downward its inflation forecast for 2015.

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The Bangko Sentral ng Pilipinas (BSP) now projects inflation for full­-year 2015 at 2.1 percent, down from a previous forecast of 2.3 percent.

For 2016, the forecast was revised downward to 2.5 percent from 2.6 percent.

“The Monetary Board decision is based on its assessment that, on balance, current monetary policy settings remain appropriate given within-target inflation forecasts and the underlying strength of domestic demand conditions, the BSP said in a statement.

In a press briefing after the policy meeting, BSP Governor Amando Tetangco Jr. told reporters that the latest baseline forecasts continue to indicate that inflation is likely to settle within the lower half of the target range of 3 percent, plus/minus 1 percentage point for both 2015 and
2016.

“Inflation expectations remain firmly anchored following recent inflation outturns,” Tetangco said.

Risks to the inflation outlook continue to be broadly balanced, he noted, adding that upside risks emanate from pending petitions for power rate adjustments and the impact of stronger­than­expected El Niño dry weather conditions on food prices and utility rates.

“On the other hand, slower global economic activity could pose downside risks to inflation,” Tetangco added.

For its key policy stance, the BSP kept the rate for overnight borrowing at 4 percent, and 6 percent for overnight lending.

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

“The Monetary Board’s decision is based on its assessment that, on balance, current monetary policy settings remain appropriate given the within­-target inflation forecasts and the underlying strength of domestic conditions,” Tetangco said.

“Ample domestic liquidity and planned higher public spending are expected to further support domestic economic activity and sustain the economy’s momentum in the months ahead,” Tetangco said.

Given these considerations, the Monetary Board believes that the prevailing policy settings remain appropriately calibrated to the outlook for inflation and domestic economic activity, he said.

“Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains in line with maintaining price and financial stability,” Tetangco said.

Emilio Neri Jr., Bank of the Philippine Islands (BPI) vice president and lead economist, shared the central bank’s view that domestic demand remains robust with private demand sustaining a healthy pace of expansion.

“The recent first quarter gross domestic product stumble has been pinned on the government’s inability to spend, an unfortunate occurrence that the BSP is not inclined to compensate for given the independence of fiscal and monetary policy,” he stated.

With the 9 percent growth rate of domestic liquidity in April and the 2.2 percent year-­to-­date inflation rate, Neri believes that the BSP sees no compelling reason to adjust monetary settings at this point.

Nevertheless, the BPI economist said the central bank may opt to unveil a number of macroprudential measures, possibly in key sectors like real estate to mitigate the chances of financial bubbles.

Neri said the details on the plans to implement a Term Auction Facility to complement the existing liquidity tools may be revealed in the coming months.

“Our central scenario remains for a BSP policy hike in the balance of 2015 in order to safeguard the inflation path going into 2016,” he concluded.

On the other hand, UK­based investment bank Barclays continues to expect the next policy decision of the central bank would lean toward a tightening in the last quarter of 2015 after the Fed begins to effect rate hikes as expected.

“In the meantime, we expect market attention to shift rapidly toward next May’s presidential election, which is likely to become a bigger focus from the third quarter,” Barclays’ analysts said in a note.

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