BSP keeps rates steady for now

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But inflation seen firming in 2017, 2018

THE PHILIPPINES maintained its key policy rates unchanged for now amid manageable inflation and brisk economic activity, as the monetary board seeks more time to study the longer-term impact of the US Federal Reserve’s more hawkish stance for 2017.

The central bank said it will be watching how the global markets will react to developments after the Fed rake hike.

“The external markets continue to face uncertainty, in particular, what comes after the Fed interest rate hike. They expect three more rate-hikes next year, but it depends on how the US economy will pan out in 2017. Its still data-dependent,” the deputy governor of the Bangko Sentral ng Pilipinas (BSP), Diwa Guinigundo, told reporters after a meeting of the Monetary Board on Thursday.


Analysts said the Philippines may not move its key rates anytime soon, and may only find the need for a tightening later in 2017.

For now, the central bank is keeping its reverse repurchase (RRP) facility rate at 3 percent, and the corresponding rates for overnight lending and deposit facilities also remain unchanged at 3.5 percent and 2.5 percen t, respectively. The reserve requirement ratio is also steady at 20 percent.

On May 16, the central bank lowered its policy rate to 3 percent from 4 percent in the run up to adopting an interest rate corridor system on June 3.

Inflation firmer in 2017

The BSP kept its inflation forecast for 2016 at 1.8 percent, but revised upward the inflation outlook for 2017 to 3.3 percent from 3 percent, and for 2018 to 3 percent from 2.9 percent.

“The Monetary Board’s decision is based on its assessment of inflation dynamics and the risks to the inflation outlook over the policy horizon,” BSP Governor Amando Tetangco Jr. said after the policy meeting on Thursday.

The latest forecasts still indicate that average inflation is likely to settle below the 3 percent ± 1 percentage point target in 2016, and return gradually to a path consistent with the inflation target 2017 and 2018 “due to higher oil prices and strong domestic economic activity.

The policy-setting Monetary Board noted that the overall balance of risks surrounding the inflation outlook remains tilted to the upside largely on pending petitions for adjustments in electricity rates, as well as the initial impact of the government’s broad fiscal reform program.

Increased uncertainty in the global economic prospects continues to be a key downside risk, Tetangco said.
“Meanwhile, inflation expectations remain broadly consistent with the inflation target over the policy horizon,” he added.

Inflation pressures

The deputy governor explained that the central bank’s 2016 to 2018 inflation forecasts were based on higher-than-expected 2.5 percent inflation rate in November, rising oil prices, the impact of stronger domestic economic activity and a weaker peso.

“Seven percent [GDP growth] is very doable for 2017. And in 2018, almost the same amount of growth is expected to be achieved. That could have some impact on domestic demand, which on balance, could also affect prices,” he said.

“Finally, we all know the peso depreciated by more than 5 percent in 2016, year-to-date—although the exchange rate pass through (ERPT) has gone down —[which]can also influence and generate some inflation pressures,” Gunigundo said.

Tetangco added that the Monetary Board has considered the potential impact of the ongoing monetary policy adjustment in the US on global financial market conditions.

At the same time, the authorities and analysts see domestic activity remaining robust with solid household spending, higher government expenditure and adequate domestic liquidity.

“The Monetary Board also noted that maintaining monetary policy settings at this juncture will give the BSP more time to assess evolving economic developments and calibrate its policy tools as appropriate,” Tetangco said.

Analyst forecasts

ANZ Research said the central bank may tighten its policy tools by the third quarter of 2017 amid strong economic growth and rising inflation.

“Considering the 15 to 24 months of monetary policy transmission lag, we reiterate our expectation that the BSP will return to the tightening table by the third quarter of 2017, raising interest rates by a total of 50 basis points by the end of 2017,” ANZ Research economist Eugenia Victorino said.

London-based research consultancy firm Capital Economics said the BSP policy rate will remain unchanged at 3 percent through 2017.

“Barring any major change in rhetoric from the BSP, we continue to think that the policy rate will remain unchanged at 3.0 percent through 2017. The consensus is for rates to be hiked at least once next year,” Capital Economics said.

“The economy is growing at a decent pace and is in little need of further support. GDP growth reached 7.1 percent year-on-year in the third quarter—the fastest pace of expansion in over three years, helped by booming investment and strong consumption growth,” Gareth Leather of the London-based research consultancy firm said.

“Although the recent election of Rodrigo Duterte as President has made the outlook more uncertain, the economy’s strong fundamentals mean growth should remain strong, at least in the short term,” he added

2%-4% inflation target retained until 2020

At the press briefing, Tetangco also announced that the government, through the interagency body DBCC, decided to keep its inflation target at 2 percent to 4 percent in 2017 and 2018.

“Structural changes in inflation dynamics, alongside improvements in the economy’s productive capacity, have been supporting a low and stable inflation environment that is consistent with the healthy pace of economic growth,” he said.

The DBCC approved the 2 percent to 4 percent inflation target for 2019 and 2020 as well.

“We believe that the inflationary trend will continue because the economy has become more competitive,” Guinigundo said when asked about the main factors the government considered when it set its inflation target for 2019 and 2020.

Guinigundo added that through the medium term, the government expects oil supply to continue to outstrip demand.

“Yes, recently the OPEC decided to cut down its prospective production quotas but there are exemptions. Two countries [took exceptions]to those quotas. At the same time, we expect that the other non-OPEC producers will also do some market protective moves, and that perhaps will result in an ample supply of petroleum in the market,” he explained.

“That would provide stability in oil price s. With that, we expect that oil prices will continue to be stable,” he concluded.

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