BSP keeps key rates, trims inflation forecast


Monetary authorities decided to keep key interest rates unchanged during their first policy meeting for the year, noting that the economy did not need additional support for now amid continued global volatility.

A day after US Federal Reserve chief Janet Yellen warned of risks to growth and indicated that gradual rate hikes remained on the table, Bangko Sentral ng Pilipinas (BSP) officials on Thursday said the policy-making Monetary Board remained watchful of developments and would adjust policy if needed.

Analysts differed as to when interest rates would finally be adjusted. An increase, they said, could come later this year or be delayed to 2017.

The inflation forecast for the year, meanwhile, was trimmed to 2.2 percent from 2.4 percent, while that for 2017 was retained at 3.2 percent.

“Average inflation is projected to settle within the target range of 3 percent plus or minus 1 percentage point for 2016 to 2017,” central bank Governor Amando Tetangco Jr. said following the policy meeting.

“The Monetary Board also noted that the risks surrounding the inflation outlook have shifted slightly to the downside,” he added.

The rise in consumer prices has fallen below the central bank’s 2 percent to 4 percent target, easing to 1.3 percent last month from the 1.5 percent recorded in December.

Central bank Deputy Governor Diwa Guinigundo said the reduction in the inflation forecast was based on lower crude oil prices and a reduction in jeepney fares.

Inflation expectations, Tetangco said, remain firmly anchored within the target band over the policy horizon.

Downward pressures could arise from slower-than-expected global economic activity and potential second-round effects from lower oil prices, while upside risks could come from the impact of prolonged El Niño dry weather conditions on food and utility prices as well as pending petitions for power rate adjustments.

The Monetary Board observed that domestic demand conditions were likely to stay firm, supported by solid private household and capital spending, buoyant market sentiment and adequate domestic liquidity.

Tetangco said they noted that lingering uncertainty over growth prospects across the globe would continue to drive volatility in financial markets.

“Going forward, the Monetary Board affirmed the continuing need for vigilance over domestic and external developments to ensure that the monetary policy stance remains in line with price and financial stability,” he said.

In a separate statement, Tetangco said the central bank was looking at the same external concerns as the US Fed.

Yellen told lawmakers on Wednesday that financial conditions in the US had become “less supportive of growth.” She pointed to uncertainty over China’s economy and commodity prices, and stuck to the Fed’s line that US growth would stay at a moderate pace.

In a text message to reporters, Tetangco reiterated that the central bank’s own assessment was that domestic conditions remained sufficiently liquid and aggregate demand fairly robust, “hence no need to provide further support to the domestic economy right now, especially as the inflation path continues to show this will move to within target in the next few months.”

“That said, we retain policy flexibility as there are risks from El Niño in medium term and from commodity and financial market volatility in the near term. These risks require a careful balancing of policy levers, to minimize any unintended consequences of actions,” he added.

After Thursday’s decision, an analyst from a local bank said monetary authorities could hike both interest and special deposit account (SDA) rates this year, while an economist from a United Kingdom-based investment bank said the accommodative stance would be extended to 2017.

“The BSP may be more inclined to finalize preparations for the Interest Rate Corridor (IRC), narrowing the corridor as clearly highlighted as early as 2015,” said Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands (BPI).

He said BPI’s central scenario remained that of a mild SDA rate hike in 2016 in order to safeguard the inflation path as Fed rate increases continue at a gradual pace.

“Moreover, the BSP is expected to cut the repurchase (by 150 basis points) and the reverse repurchase (by 100 bps) to tighten the IRC to improve efficiency in transmission of monetary policy,” Mapa said.

Barclays economist Rahul Bajoria said the UK-based investment bank continued to expect the next policy move to be a rate hike, but only in the second quarter of 2017 as Philippine economic growth is expected to slow to 5.5 percent this year.

Bajoria added that the hike was also only likely to materialize if growth had recovered sufficiently and inflation was high enough to justify an increase.

“Although there is external uncertainty in the form of a slowing global economy, 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,” he said.

The central bank’s overnight borrowing and lending rates remain at 4 percent and 6 percent, respectively. The SDA rate was kept at 2.5 percent, while the reserve requirement ratio for banks still stands at 20 percent.


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