BSP keeps rates, cuts inflation forecasts

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Monetary authorities kept key interest rates unchanged as expected on Thursday but trimmed inflation forecasts for this year up to 2017.

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Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco said the policy-making Monetary Board’s decision was based on its assessment of inflation dynamics and risks to the outlook.

Analysts said a policy rate hike could be pushed back to 2017.

“Latest baseline forecasts continue to indicate that inflation could settle below the target range of 3 percent plus or minus 1 percentage point for 2015,” Tetangco told reporters following Thursday’s rate-setting meeting.

The rise in consumer prices has fallen below the central bank’s 2 percent to 4 percent target, staying at the record low of 0.4 percent last month.

The new 2015 inflation forecast is 1.4 percent, the current year-to-date average. The previous full-year forecast was 1.6 percent.

“[N]otwithstanding the recent low inflation readings, inflation is projected to return steadily to a path consistent with the inflation target for 2016-2017, the foreseen adverse weather conditions and the pending petitions for utility rate increases,” Tetangco said.

For 2016, the Monetary Board adjusted the inflation forecast to 2.3 percent from 2.6 percent and trimmed this further to 2.9 percent from 3 percent for 2017.

The central bank’s overnight borrowing and lending rates were kept at 4 percent and 6 percent, respectively. The special deposit account (SDA) rate was also held steady at 2.5 percent, while the reserve requirement ratio for banks still stands at 20 percent.

Central bank Deputy Governor Diwa Guinigundo said the revised 2015 inflation forecast was due to lower September and October figures, both at the record low of 0.4 percent, as well as a decline in oil and other commodity prices.

Tetangco said inflation expectations remained anchored within the target band, with risks to the outlook broadly balanced.

Upside pressures could come from the impact of protracted El Niño dry weather conditions on food prices and utility rates, while downside risks could arise from slower-than-expected global economic activity.

The Monetary Board also observed that domestic demand conditions had stayed firm, with business and consumer sentiment still buoyant and domestic liquidity adequate.

“Growth is expected to be driven by continued consumption spending. We expect that with the [growth of]overseas remittances remaining robust at around 4 percent to 5 percent … [and]BPO [business process outsourcing]revenues employing basically young people, I think these are the factors that will drive continued robustness in consumption spending,” Guinigundo said.

He said investments were also gaining traction and that there was scope for further acceleration in government spending.

“So we will expect that growth based on the government’s target of 7 percent to 8 percent is something that is doable for 2016 and 2017,” Guinigundo said.

Tetangco said the Monetary Board had noted that a challenging external environment and uneven growth prospects in advanced and key emerging economies supported the decision not to adjust policy.

“Given these considerations, the Monetary Board believes that the benign inflation environment and the economy’s underlying growth momentum provide adequate room to maintain the monetary policy settings,” he said.

Tetangco reiterated that the BSP would continue to monitor emerging conditions to ensure price and financial stability conducive to sustainable economic growth.

Rate hike in 2017

Following Thursday’s decision, private analysts said key rates would likely remain steady for the rest of the year and even up to the end of 2016.

Capital Economics Asia economist Gareth Leather said the central bank was unlikely to be in any hurry despite below-target inflation.

“Inflation now looks to have bottomed out and should accelerate over the coming months as the impact of the fall in oil prices drops out of the annual comparison,” he said.

“We expect inflation to move toward the mid-point of the BSP’s 2 percent to 4 percent target range by the middle of 2016,” Leather added.

He noted that more of a concern would be a run of poor economic data, with remittances falling for the first time in over a decade in August and exports contracting by 25 percent in September.

“Industrial production has also been subdued. However, much of the recent weakness in the monthly data has been due to one-off factors, and we are confident that growth will rebound in the coming months,” he said.

“Barring any sudden change in rhetoric in the statement, we continue to think rates will remain unchanged at 4 percent at least until the end of next year. The consensus is currently for interest rates to finish next year at 4.5 percent.”

Rahul Bajoria, an economist at the UK-based Barclays, said the central bank had remained
on the sidelines throughout 2015 and would likely stay so in 2016 as well.

“Even with low inflation and slower-than-expected first half growth, BSP appears comfortable with its policy stance, emphasizing that growth and upside inflation risks stem largely from poor weather and administered price hikes,” he said.

Barclays continued to expect the next policy move to be a rate hike but with 2016 growth now likely to be slower than previously forecast. It said the economy would likely expand by 5.5 percent for both this year and the next.

The rate hike will now likely happen in the second quarter of 2017 instead of the third quarter of 2016, with Bajoria saying it will materialize when growth recovers sufficiently and inflation is at a comfortable level.

“Although there is external uncertainty in the form of the Fed rate hike cycle, we think the Philippines’ strong external position and low level of short-term debt should provide BSP enough policy space to maintain an accommodative stance even if rates in US head higher,” he said.

Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands, said that their central scenario was for an SDA rate hike in early 2016 in order to safeguard the inflation path as a Fed rate hike and the El Niño could increase inflationary pressures.

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