Inflation forecast lowered
Monetary authorities decided to keep key interest rates unchanged at their fifth policy meeting for the year on Thursday, noting that domestic eco-nomic conditions continue to be favorable.
Analysts said the central bank’s decision to keep its main policy rate on hold is widely expected.
The Bangko Sentral ng Pilipinas (BSP) also lowered its inflation forecast for the year to 1.8 percent from 2 percent. Its inflation forecast for 2017 was also adjusted downward at 2.9 percent from 3.1 percent, but the forecast of 2.6 percent 2018 was unchanged.
The rate for the reverse repurchase (RRP) facility remained at 3.0 percent. The BSP also held the corresponding rates for overnight lending and deposit facilities steady at 3.5 percent and 2.5 percent, respectively. The reserve requirement ratios were 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 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 overall balance of risks surrounding the inflation outlook is now deemed to be broadly balanced, with upside risks emanating from pending petitions for adjustments in electricity rates,” Tetangco said.
Slower global economic activity remains the key downside risk to the inflation outlook, he added.
“Meanwhile, inflation expectations continue to be broadly in line with the inflation target over the policy horizon,” he said.
Lower oil prices
Explaining why BSP lowered its inflation forecast for 2016, Deputy Governor Diwa Guinigundo said the central bank considered lower oil prices, soft global growth, and the impact of a 1.9-percent headline inflation rate in June and July.
“Lower oil prices continue to drive domestic inflation. Secondly, global growth continues to be soft. In fact, that was the announcement of the US government when it announced a disappointing second-quarter output growth,” he said.
Guinigundo said this means that the external component in the national income account can moderate because the United States is a key market for many emerging economies including the Philippines.
“Thirdly, the impact of June and July inflation rates of 1.9 percent. Those were lower compared to our initial assessment,” he said.
Tetangco said the Monetary Board noted the prospects for global growth remain subdued since the previous meeting.
By contrast, domestic economic conditions continue to be firm, he said, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity.
Higher fiscal spending is also expected to boost domestic demand.
Giving these considerations, Tetangco said, the Monetary Board believes 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 requires prudence in policy settings,” he added.
Analysts at ANZ Research expect the BSP to maintain its course through 2016, penciling policy tightening in the second quarter of 2017 instead.
“Our outlook for average inflation through the next 12 months is likely to remain within the inflation target range. Our expectation of Fed tightening in December 2016 should presage tighter monetary conditions in the Philippines,” they said.
London-based research consultancy Capital Economics said the central bank is under no pressure to cut rates to support the economy as the gross domestic product data due to published next week would likely show the pace of growth accelerated in the second quarter.
Gareth Leather, senior Asia economist for Capital Economics, said there is little sign that strong growth is feeding into price pressures.
“Although inflation is likely to pick up over the coming months as the impact of last year’s falls in commodity prices starts to drop out of the annual comparison, it is still likely to remain comfortably within the central bank’s target range,” he said.
Capital Economics continues to think that the policy rate will remain unchanged at 3 percent not just until the end of 2016, but to the end of 2017.
“The consensus is also expecting rates to be left unchanged this year, but most analysts are expecting at least one hike next year,” Leather said.