BSP keeps policy rates unchanged


PHILIPPINE monetary authorities on Thursday maintained key interest rates during their seventh policy meeting for the year, citing manageable inflation and firm economic activity.

Analysts have differing timeframes on when the Bangko Sentral ng Pilipinas (BSP) would adjust policy settings.

The central bank also revised upward its inflation forecast for the year to 1.8 percent from 1.7 percent. Its inflation outlook for 2017 and 2018 were also revised at 3 percent and 2.9 percent from the previous forecasts of 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 lowered its headline rate to 3 percent from 4 percent in the run up to adopting an interest rate corridor system on June 3.

“The Monetary Board’s decision is based on its assessment that the inflation continues to be manageable, with a gradual return to the inflation target range expected over the policy horizon,” 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 ± 1 percentage point target in 2016, and rise toward the mid-range of the target in 2017 and 2018, he said.

The policy-setting Monetary Board observed the overall balance of risks surrounding the inflation outlook remains tilted to the upside largely on pending petitions for adjustments in electricity rates along with the proposed tax policy reform program.

Slower global economic activity continues to be a key downside risk, Tetangco noted.

“Meanwhile, inflation expectations remain broadly consistent with the inflation target over the policy horizon,” he said.

Inflation pressures

Deputy Governor Diwa Guinigundo noted the central bank revised its 2016 to 2018 inflation forecasts based on higher actual inflation rates in September and October, the rebound in petroleum prices and a weaker peso.

“We have seen how the peso has depreciated in recent months and this is expected to contribute to more inflationary pressures in the next two years,” he said.

Tetangco noted the Monetary Board also observed the prospects for global economic growth remain modest and uneven since its previous meeting.

“Moreover, monetary policies in major advanced economies continue to be asynchronous and the prospects uncertain,” he said.

On the other hand, domestic activity is seen to remain firm with solid household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity.

Higher fiscal spending is also expected to further boost domestic demand in the near term, Tetangco said.

“On balance, the assessment of recent new information continues to support keeping monetary policy settings unchanged. Going forward, the BSP will continue to monitor emerging price and output conditions to ensure price and financial stability conducive to sustained economic growth,” Tetangco said.


ANZ Research is forecasting the central bank tightening its policy tools by the third quarter of 2017 on the back of inflationary pressures from higher infrastructure spending.

“We expect the BSP to be the first central bank in the region to tighten its policy tools by Q3 2017,” ANZ Research economist Eugenia Victorino said.

Victorino said the forthcoming boost in infrastructure spending will likely keep domestic demand strong amid shifts in the external environment.

“Meanwhile, the central bank has more time to facilitate the gradual migration of excess liquidity to its new term deposit facility (TDF),” she added.

London-based research consultancy firm Capital Economics said BSP policy rate will remain unchanged at 3 percent not just until the end of 2016, but through 2017 as well.

“Looking ahead, we think the BSP will be in little hurry to either cut or raise interest rates any time soon. We remain broadly optimistic over the country’s growth prospects, which are being supported by a combination of strong consumption and rapid investment growth,” said Capital Economics’ Gareth Leather.

However, recent political events both in the US and domestically have increased the prospects of market as well as trade and investment uncertainties.

“It remains to be seen if Donald Trump will follow through on some of his more protectionist policies, but if he did the repercussions for the Philippines would be significant,” he added.

However, Leather noted a more pressing concern for the central bank is the recent acceleration in credit growth, which if sustained could put the health of the financial sector at risk.

“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 said.


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