BSP maintains policy, inflation forecasts

By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) yesterday kept borrowing rates unchanged in the face of manageable inflation and robust economic activity, despite risks from rising global interest rates and geopolitical tensions.

As widely expected, the Monetary Board steadied its policy stance for the 24^th straight meeting. The central bank kept the overnight lending rate at 3.5%, the overnight reverse repurchase rate at 3.0% and the overnight deposit rate at 2.5% during its sixth review this year.

Reserve requirement ratios (RRR) imposed on banks were also left untouched.

“The Monetary Board’s decision is based on its assessment that the inflation environment remains manageable. Latest forecasts show the future inflation path will continue to be within the target range for 2017-2019,” BSP Governor Nestor A. Espenilla, Jr. said in a press briefing yesterday.

“[W]hile 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. The outlook for domestic economic activity remains firm, supported by positive consumer and business sentiment and ample liquidity.”

The central bank pushed through with its scheduled policy review as well as the regular clearing and settlement operations on Thursday despite President Rodrigo R. Duterte’s decision to suspend government work and classes in public schools for a National Day of Protest, which coincided with the 45^th anniversary of martial law declaration under the late strongman Ferdinand E. Marcos.

Inflation averaged 3.1% for the first eight months, staying within the central bank’s 2-4% target range. Overall commodity prices increased by 3.1% in August from a year ago.

The BSP’s review also came right after a similar meeting in the United States, which saw the Federal Reserve maintain key rates but hint that a December hike remains on the table.

Reuters reported that the Fed will start unwinding its $4.2-trillion bond portfolio next month as part of its rate normalization strategy, while a third rate hike by 25 basis points may be introduced before the year ends.

The announcement came even as US inflation rate slipped in August, with Fed Chairperson Janet L. Yellen saying that US monetary authorities still have to see whether the slowdown would be sustained.

NOT AS MUCH IMPACT
Yesterday, BSP Deputy Governor Diwa C. Guinigundo said there will be “some impact” on the Philippines once the Fed lets go of its bond holdings, “but not as much as when the US Fed decides on an interest rate action.”

Central bank officials have said that the BSP would not have to move in sync with the Fed’s tightening moves as domestic price and liquidity conditions remain the biggest concerns for the monetary authority.

The BSP’s Monetary Board last raised benchmark interest rates on Sept. 11, 2014, even as it introduced procedural cuts in June last year to make room for the shift to an interest rate corridor scheme.

Analysts at Nomura Global Research said they expect the BSP to remain on hold for the rest of the year, but noted that banks’ reserve standard may be tweaked before any interest rate adjustments.

“Despite limited clues, we still do not rule out RRR cuts this year, and this view is supported by BSP’s continued comfort with the inflation outlook,” Nomura analysts said in a note e-mailed to journalists yesterday.

“As we argued before, Governor Espenilla has a stronger bias to deliver on BSP’s goal to reduce the RRR than his predecessor, provided the inflation outlook remains benign.”

On the other hand, London-based Capital Economics said the BSP has some room to keep policy rates unchanged even until 2018. “With the economy growing at a decent pace and the outlook remaining positive, there is little need for more supportive monetary policy,” Capital Economics said in a separate note.

INFLATION GENERALLY STEADY
The central bank also maintained its inflation forecast for this year and 2018, but announced a slightly higher estimate for 2019 amid expectations of rising global crude prices and a bigger-than-expected increase in daily minimum wage that was approved this month.

Mr. Guinigundo said monetary authorities expect inflation to average 3.2% annually over the next three years, essentially keeping the forecasts over the next two years and raising the 2019 estimate from 3.1% previously.

The weaker exchange rate also adds to inflation pressures, alongside the P21 increase in daily minimum wage for private sector workers in Metro Manila, that will take effect in October.

The peso has been trading at the P51 level against the greenback as of yesterday, which is beyond the P48-50 assumption given by the central bank earlier this year.

The BSP will hold its next rate review on Nov. 9.