Key rates unchanged, inflation ‘under control’

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Key interest rates were kept unchanged as expected on Thursday, with monetary officials again saying that inflation is expected to remain under control.

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Consumer price growth forecasts for this year and the next were consequently retained but the outlook for 2019 was slightly raised given upside risks, the Bangko Sentral ng Pilipinas (BSP) said.

The BSP’s policy-making Monetary Board kept the central bank’s overnight reverse repurchase, overnight lending and overnight deposit rates at 3 percent, 3.5 percent and 2.5 percent, respectively.

Reserve requirement ratios were likewise kept at 20 percent.

“The Monetary Board’s decision is based on its assessment that the inflation environment remains manageable,” central bank Governor Nestor Espenilla Jr. told reporters.

The 3.2 percent inflation forecasts for this year and the next were maintained but the outlook for 2019 was raised to 3.2 percent from 3.1 percent.

Central bank Deputy Governor Diwa Guinigundo cited a weaker peso, higher oil prices, increased domestic liquidity and a minimum wage hike as reasons for the revision.

“There are at least four reasons behind the increase in the forecast. One is the depreciation of the peso,” he said.

The peso, which has been described as the worst-performing currency in Asia this year, fell back to the P51:$1 level on Thursday, closing at P51.08 to the greenback.

Another reason is higher oil prices and the third high liquidity, Guinigundo said.

“We continue to see robust economic activity and that will also increase the demand for liquidity. Liquidity is also going up because of sustained demand for domestic credits. This is consistent with the expansion of economic activity,” he added.

Lastly, Guinigundo noted the recent announcement of a P21 increase in Metro Manila minimum wages that is scheduled to take effect next month.

Within target

Espenilla said the future inflation path was expected to stay within the 2 percent to 4 percent target range.
“[I]nflation expectations remain firmly anchored close to the midpoint of the government’s 3 percent plus or minus 1 percentage point target over the policy horizon,” he said.

The balance of risks, however, remained tilted towards the upside and the BSP said monetary authorities would keep an eye on evolving economic growth and liquidity conditions.

“At the same time, while prospects for global economic growth have stayed broadly upbeat, geopolitical tensions and lingering uncertainty over macroeconomic policies in advanced economies continue to pose downside risks to external demand,” Espenilla said.

He said the government’s proposed tax reform program could exert potential pressure on prices but various social safety nets and a resulting improvement in output and productivity would temper the impact on inflation
The outlook for domestic activity remains firm, Espenilla added, supported by positive consumer and business sentiment and ample liquidity.

“Moreover, as credit for production activities continues to expand in line with output growth, the economy’s absorptive capacity is likewise seen to improve, thus mitigating inflation pressures over the long run,” he said.

Analysts’ expectations

London-based research consultancy firm Capital Economics said it was no surprise that the policy rate was kept unchanged. While inflation had recently rebounded, at 3.1 percent in August, it remained within BSP’s target range.

“Much of the rise was driven by a pickup in fuel inflation, which should prove temporary. Core inflation figures suggest underlying price pressures remain in check,” it said.

With the economy growing at a decent pace and the outlook remaining positive, there is little need for more supportive monetary policy, Capital Economics added.

“We continue to think that the policy rate will remain unchanged at 3 percent throughout 2017 and 2018,” it said.

Australia’s ANZ Research also said it expected inflation to remain anchored to the central bank’s target range through 2019.

Upside risks persist but with the tax reform package still to be approved, inflation expectations are unlikely to rise significantly, it said.

“We are still of the view that interest rate tightening is warranted considering the intensifying imbalances in the economy. But our call for a tightening in fourth quarter could be delayed if near-term inflation pressures stay contained,” ANZ Research said.

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