• BSP keeps policy rates unchanged


    2016 inflation forecast lowered

    PHILIPPINE monetary authorities decided on Thursday to maintain key interest rates during their sixth policy meeting for the year as inflation remained manageable and economic activity continued to be firm.

    Analysts, on the other hand, offered different timeframes on when the Bangko Sentral ng Pilipinas (BSP) would break the status quo.

    The central bank also lowered its inflation forecast for the year to 1.7 percent from 1.8 percent. Its inflation forecasts for 2017 and 2018 were retained at 2.9 percent and 2.6 percent, respectively.

    The rate for the reverse repurchase (RRP) facility was also kept at 3.0 percent, while the corresponding rates for overnight lending and deposit facilities were kept steady at 3.5 percent and 2.5 percent, respectively. The reserve requirement ratio was also left unchanged at 20 percent.

    On May 16, the central bank cut its headline rate to 3 percent from 4 percent as part of the shift to an Interest Rate Corridor system on June 3.

    “The Monetary Board’s decision is based on its assessment that the inflation environment remains manageable,” BSP Governor Amando Tetangco Jr. said after the policy meeting.

    Latest forecasts continue to indicate that the average inflation is likely to settle slightly below the 3 percent plus or minus 1 percentage point target in 2016 and rise toward the mid-point of the target in 2017 and 2018, he said.

    The policy-setting Monetary Board observed that inflation was still being driven mainly by supply-side factors.
    “At the same time, the overall balance of risks surrounding the inflation outlook appears tilted to the upside, with pending petitions for adjustments in electricity rates along with the proposed adjustment in the excise tax rates of petroleum products and the potential second-round effect on transport fares,” Tetangco said.
    Slower global economic activity poses the main key downside risk, he added.

    “Nevertheless, inflation expectations remain broadly in line with the inflation target over the policy horizon,” he said.

    Lower oil prices

    Explaining why the BSP lowered its inflation forecast for 2016, Deputy Governor Diwa Guinigundo said the central bank considered the 1.8 percent headline inflation rate in August.

    The BSP expects that in the third quarter, the impact of election-related spending and the impact of the rainy season in the third quarter of 2016 have set in and will show some moderation in economic activity, according to the deputy governor.

    “Of course in the 2017, we can see a return to a more robust economic activity,” he said.

    “The central bank is also expecting some delay in power rates adjustments. So if we take this all, the 2016 forecast will show some slight downward adjustment to 1.7 percent,” he added.

    Guinigundo noted the BSP expects some second-round effects on fuel prices in transport fares if the planned higher excise tax on fuel will be passed in the 17th Congress.

    “It is very difficult at this point to talk about the impact, but our preliminary numbers indicate that notwithstanding the adjustment in fuel prices and transport fare, the resulting inflation will still be within the 2 percent to 4 percent inflation target for 2016 and 2017,” Guinigundo noted.

    “After all, we don’t expect it to be approved or legislated by Congress until 2017. We have to consider the timing of the actual implementation of the increase in the excise tax,” he said.

    Tetangco said the Monetary Board also recognized that while global economic conditions have remained subdued since the previous meeting, trends in domestic economic activity show sustained firmness, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity.

    “Given the fiscal space, higher public spending is also expected to further boost domestic demand,” he said.
    With these considerations, Tetangco said monetary authorities believe that current monetary policy settings remain appropriate.

    “At the same time, increased uncertainty over prospects for growth and monetary policy action in major advanced economies warrants prudence in policy settings.

    ‘Looking ahead’

    London-based research consultancy firm Capital Economics continues to think that the policy rate will remain unchanged at 3 percent not just this year, but until the end of 2017.

    “Looking ahead, we think the BSP will be in little hurry to either cut or raise interest rates anytime soon,” Capital Economics Senior Asia Economist Gareth Leather said, noting the economy remains in good shape, and is in little need of further support.

    “Although the recent election of Rodrigo Duterte as president has made the outlook more uncertain, barring any sudden change in policy direction the economy should continue to grow strongly over the next couple of years,” he added.

    One area for concern is that credit growth has started to accelerate again, which if sustained, could put the health of the financial sector at risk.

    “We are particularly concerned about an increase in lending to the property sector. That said, the central bank has traditionally preferred to manage these risks through the use of macroprudential measures, and we doubt stronger credit growth will be the trigger for the BSP to raise rates,” he added.

    Singapore-based banking giant DBS noted a combination of strong economic growth and benign inflation makes it easy to justify the status quo of the BSP.

    “At this juncture, we remain of the view that the next move from the BSP is more likely to be a rate hike rather than a cut. Arguably, this may take place in early-2017,” it said.

    As distortion from low oil prices dissipates going into 2017, inflation is set to average around 2.6 percent next year, it said.

    Even if inflation is within the central bank’s target range, the anticipated upward pressure from global rates may prompt the BSP to tighten its policy stance.

    “And let’s not forget that GDP growth is still running in excess of 6 percent. Overheating risks remain as long as investment growth stays above 20 percent,” DBS pointed out.


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