The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) decided to keep its key interest rates unchanged at its policy meeting on Thursday.
The decision had been widely anticipated by analysts as the current inflation rate looked benign, money supply growth curbed and domestic activity remained firm.
“The Monetary Board’s decision is based on its assessment that prevailing monetary policy settings remain appropriate,” BSP Governor Amando Tetangco Jr. told reporters at a press briefing after the meeting.
The rate for the overnight borrowing, or reverse repurchase (RRP) facility, stays at 4 percent and the rate for overnight lending, or repurchase facility, remains at 6 percent.
The rate for the special deposit account (SDA) also remains at the current level of 2.50 percent, as is the reserve requirement ratio (RRR) for banks at 20 percent.
Tetangco said the latest baseline forecasts show a lower inflation path within the target range of 3 percent, plus or minus one percentage point for both 2015 and 2016, while inflation expectations remain firmly anchored.
The BSP governor added that inflation pressures have moderated further since the previous monetary policy meeting held December 11 last year, reflecting mainly the significant decline in international oil prices.
“At the same time, the Monetary Board observed that prospects for domestic activity continue to be firm, and positive growth dynamics are expected to be supported by buoyant private demand, sustained bank lending growth, and upbeat business sentiment,” he said.
Cuts inflation forecast for 2015-2016
The central bank also cut its inflation forecast for full-year 2015 to 2.3 percent from the previous forecast of 3 percent. For 2016, the forecast was also trimmed downward to 2.5 percent from 2.6 percent.
“The Monetary Board also noted that the risks to the baseline inflation forecast remain broadly balanced, with potential price pressures emanating from pending petitions for adjustments in utility rates and possible power shortages,” Tetangco said.
However, he warned that downside risks could arise from possible slower-than-expected global economic activity.
In this regard, the Monetary Board is of the view that the within-target inflation outlook and robust domestic growth support keeping policy settings steady, he said.
“Going forward, the BSP will continue to monitor developments affecting the inflation outlook to ensure that the monetary policy stance remains consistent with its price and financial stability objectives,” he added.
Analysts from UK-based investment bank Barclays said the Monetary Board’s decision was in line with the bank’s forecast and the consensus view.
“In remarks following the decision, Governor Tetangco maintained the more neutral tone of recent commentary, stating that while inflationary pressures had moderated, domestic activity is firm,” they stated in a commentary.
The Barclays analysts also believe the easing inflationary pressures and the slower money supply growth gives the BSP room to keep interest rates on hold for the time being.
The analysts said they continue to forecast the next hike in the policy rate to take place in the fourth quarter of 2015.
“This was well-expected for now. Hardly any analyst thought otherwise. However, the subsequent meetings may have different outcomes,” said Dr. Victor Abola, economist at the University of Asia and the Pacific.
Given the low inflation environment and the easy monetary policies in neighboring countries, the BSP also should consider easing its policy rates, he said.
“For one, while inflation is now at the lower half of the BSP’s target of 2 percent to 4 percent, with little chance of accelerating this year, and other Asean and East Asian countries are easing their monetary policy as a response to the euro zone’s and Japan’s quantitative easing, the BSP should seriously consider easing as well in order to prevent another round of disastrous peso appreciation,” he said.
Meanwhile, Patrick Ella, economist at Security Bank Corp. said Tetangco’s statement about the Monetary Board’s current policy stance gave no indication of any bias—whether cuts or hikes—going forward.
“And BSP does expect inflation in February to tick up due to utility price and pump price adjustments. Otherwise, the neutral policy stance remains in place,” he said.
Sharing the same view, HSBC economist Trihn Nguyen said the Monetary Board’s decision was expected as inflation is contained and growth is robust.
“We expect the central bank to keep rates on hold [while it continues]to monitor external and domestic conditions. Benign inflationary pressures give it plenty of room to do so,” she said.