THE Philippine central bank held its key interest rates steady as expected, but lowered its inflation forecast for 2015 at a monetary policy meeting on Thursday.
The Bangko Sentral ng Pilipinas (BSP) now projects inflation for the full year at 1.8 percent, down from a previous forecast of 2.1 percent.
For 2016, the forecast was retained at 2.5 percent.
“The Monetary Board decision is based on its assessment that prevailing price and output conditions support maintaining the current monetary policy settings,” the BSP said in a statement.
In a press briefing held after the meeting, BSP Governor Amando Tetangco Jr., however, told reporters that the latest baseline forecasts show inflation could settle slightly below the target range for 2015.
Specifying the BSP’s inflation projection for this year at 1.8 percent, down from a previous forecast of 2.1 percent, BSP Deputy Governor Diwa Guinigundo said in the same briefing: “For 2015, it is 1.8 percent and for 2016 it’s 2.5 percent. Food prices are down and other commodity prices are also down, particularly oil. In fact, the assumption on oil is a lot lower compared with what we assumed in the last meeting of the Monetary Board.”
Over the rest of the policy horizon, inflation is likely to be within the target range of 3 percent, plus/minus 1 percentage point, Tetangco said.
The Monetary Board sees upside risk coming from pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food prices and utility rates.
“On the other hand, a modest rise in food and commodity prices, and slower global economic activity could pose downside risks to inflation,” Tetangco added.
Key rates unchanged
For its key policy stance, the Monetary Board kept the rate for overnight borrowing at 4 percent and that for overnight lending at 6 percent.
The BSP also held the special deposit account (SDA) rate steady at 2.50 percent, while the reserve requirement ratio (RRR) for banks still stands at 20 percent.
“In deciding to keep the BSP’s monetary policy settings unchanged, the Monetary Board observed that the recent benign inflation outturns have been the result of favorable supply-side conditions, which are seen as largely transitory,” Tetangco said.
At the same time, global developments could pose threats to financial stability, but the Monetary Board believes that the prevailing policy settings remain appropriately calibrated at this time, Tetangco said.
Guinigundo pointed out one reason the central bank decided to hold its key policy rates unchanged is sustained domestic demand.
“There is demand in the market. I think that has been the underlying reason for the BSP not to move in the last so many meetings of the Monetary Board, while inflation conditions continued to be benign for 2015, at least for the first seven months of the year,” he said.
“There seems to be no reason for additional monetary support in terms of either reducing the policy rates or the SDA rate, or perhaps, for reducing the reserve requirement by so much.”
Guinigundo said the economy remains strong even at a slower-than-expected rate of 5.2 percent in the first quarter of the year, while domestic liquidity or M3 and bank lending continue to grow.
“The latest data showing at least a 9 percent increase in M3 and loans outstanding continue to grow by more than 14 percent. So we don’t see the urgency at this point to adjust the monetary policy,” Guinigundo added.
Little impact on peso
Asked about any impact of the yuan devaluation on the Philippine exchange rate policy, Guinigundo said: “The exchange rate is also one of the factors that the Monetary Board is also looking at, and time and again, we emphasize that the peso is market-driven. We’ve seen some regional pressures on account of the recent move of the People’s Bank of China to adjust its fixing rate with respect to the yuan. There was a nearly 2 percent devaluation for the Chinese yuan and this affected the regional currencies. The Philippines was also affected, although the numbers would show that we are one of the least affected. So the exchange rate movement and whatever else we can expect, have been taken into account by the Board.”