• POLICY SETTINGS KEPT STEADY

    BSP raises inflation outlook

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    Monetary authorities revised upward the inflation outlook to 3.5 percent from 3.3 percent for 2017, and to 3.1 percent from 3 percent for 2018, but kept policy settings unchanged.

    From left: bangko sentral ng Pilipinas (bsP) officer-in-charge nestor Espenilla Jr. and deputy Governor diwa Guinigundo.

    “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 Officer in Charge and Deputy Governor Nestor Espenilla Jr. told reporters after the policy meeting on Thursday.

    The balance of risks surrounding the inflation outlook continues to lean toward the upside, given possible adjustments in electricity rates as well as the initial impact of the government’s broad fiscal reform program, the policy-setting Monetary Board noted.

    While inflation has risen because of recent increases in food and oil prices, the BSP said latest forecasts continue to indicate that the inflation path will remain within the target range of 3 percent ± 1 percentage point for 2017 and 2018.

    “Inflation expectations are also aligned with the inflation target over the policy horizon,” Espenilla said.
    The uncertainty surrounding global growth prospects continues to be a key downside risk to the inflation outlook, he added.

    The Monetary Board took note of higher oil prices and the peso-dollar exchange rate that has depreciated in the last quarter of 2016, BSP Deputy Governor Diwa Gunigundo said during a separate press briefing.

    Domestic demand continued to be firm and the minimum wage adjustments in June 2016 were also taken into consideration, Guinigundo said.

    While the global economic environment has become more challenging with the shifting macroeconomic policies in advanced economies, including the ongoing normalization of monetary policy in the US, domestic economic activity is expected to stay firm, supported by buoyant household consumption and private investment, higher fiscal spending and ample credit and liquidity, Espenilla said.

    “With these considerations, the Monetary Board believes that prevailing monetary policy settings remain appropriate. Going forward, the BSP will continue to monitor and assess evolving economic developments and will calibrate its policy tools as appropriate to ensure sustained price and financial stability,” he said.

    During the policy meeting, the board decided to keep policy rates unchanged and noted the inflation rate will continue to be within the central bank target and domestic economic activity will remain firm amid a more challenging global environment.

    The central bank has maintained the reverse repurchase (RRP) facility rate at 3 percent. The corresponding rates for overnight lending and deposit facilities also remain unchanged at 3.5 percent and 2.5 percent, respectively. The reserve requirement ratio was kept steady at 20 percent.

    Expectations

    ANZ Research said it expects the BSP to raise its interest rate corridor by the third quarter of 2016 as the inflation rate accelerates.

    “We expect inflation to remain on an upward trend initially, pushed by annual gains in commodity-related items over the first half of the year. Meanwhile robust domestic demand, coupled with the government’s push for infrastructure spending, will likely push inflation higher throughout 2017,” ANZ Research economist Eugenia Victorino said.

    Liquidity conditions, which have started to normalize after the Christmas and New Year holidays, are an indication of the central bank’s increasing bias to tighten policy rates medium-term, Victorino pointed out.
    Looking at the oversubscribed term deposit facility (TDF) auctions for the seven- and 28-day facilities, she said that the TDF rates remain elevated despite some marginal easing from the peak in December.

    “In our view, this is indicative of the rising bias of the central bank to upwardly adjust its interest rates in the medium-term. Hence, we maintain our expectations of interest rate hikes by Q3,” Victorino said.

    However, London-based research consultancy Capital Economics (CE) said the policy rate will remain unchanged at 3 percent through 2017.

    “With the economy continuing to expand at a rapid pace, there is no need for monetary policy to be eased. GDP grew by 6.6 percent year-on-year in Q4, helped by a combination of rapid export growth and booming investment,” according to CE.

    “The election of Donald Trump in the US has made the outlook more uncertain, but the economy’s strong fundamentals mean growth should remain strong, at least in the short term,” it said.

    But subdued price pressures mean there is no need for the central bank to hike interest rates either, it added.

    “Although the headline inflation rate has been drifting higher in recent months, at 2.7 percent year-on-year in January, it remains comfortably within the BSP’s 2 percent to 4 percent target range,” CE explained.

    “Higher energy price inflation is likely to push up the headline rate over the coming months, but with underlying inflationary pressures benign, we expect headline inflation to remain within the BSP’s comfort zone,” it added.

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