The Bangko Sentral ng Pilipinas (BSP) said it does not need to respond immediately to any United States Federal Reserve policy action as the Philippines’ inflation rate outlook proves appropriate at present.
“In the past we have been saying as well that we do not have to respond immediately with any pressure coming from the US Fed,” Bangko Sentral Deputy Governor Diwa Guinigundo told reporters late Thursday.
The US Fed on Wednesday (Thursday in Manila) kept its benchmark interest rate unchanged and gave no clear signal about the chances of another rate increase this year or about any concern over low inflation.
The US central bank, however, did confirm it plans to begin reducing its massive bond holding “relatively soon.”
The US is reported to have $4.5 trillion of government and mortgage debt. The plan to wind down its balance sheet is seen indicating the Fed’s upbeat outlook on the US economic recovery.
Looking inward, the BSP sees a different set of factors as basis for its next policy move.
“I think we have our own idiosyncratic considerations for the domestic economy,” Guinigundo said.
“Yes interest rate differentials will be a material factor when the US Fed starts jacking up interest rates… But if you look at the probability of a further increase or normalization of the US Fed, I think it has gone down from over 90 percent to about 40 percent or 50 percent,” he explained.
For the rest of the year, the BSP does not expect any additional pressure to come from the US central bank, Guinigundo said, seeing the next Fed interest rate hike possibly happening in the first quarter of 2018.
While there seems to be some recovery in US growth, Guinigundo does not see that necessarily resulting immediately in more jobs.
“And in the general scheme of things we don’t expect the US Fed to continue exerting pressure on us to start considering a possible tightening of monetary policy in the Philippines,” he said.
“After all, with [an average]inflation rate [forecast]of 3.1 percent in 2017 and 3 percent for 2018 and 2019, there is very little reason why the BSP should start considering a possible increase in our policy rate,” he added.
The central bank—after lowering its reverse repurchase rate to 3 percent from 4 percent on May 16, 2016 in the runup to adopting an interest rate corridor system on June 3 that year— kept its key policy rate unchanged at its June 22 meeting.
The Bangko Sentral said in its recent inflation report that baseline forecasts showed that inflation was likely to settle near the midpoint of the government’s target range of 2 percent to 4 percent in 2017 to 2019.
Inflation is projected to peak in the third quarter of 2017, driven by positive base effects and continued strength in domestic economic activity before it reverts to the midpoint of the target range in 2018 to 2019.
Risks to future inflation remain tilted toward the upside. The impact of the government’s fiscal reform program and the pending petitions for adjustments in electricity rates are the main upside risks to inflation, the BSP report said.
Meanwhile, the main downside risk to inflation is expected to continue to be in the uncertainty about the global economic landscape.
The prevailing inflation outlook supports the view of keeping the policy rates steady,” it added.