BSP keeps rates steady

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) decided yesterday to keep interest rates steady amid the manageable inflation environment and strong domestic economic activity.

BSP officer-in-charge Nestor Espenilla Jr. said the central bank decided to maintain the interest rates at 3.5 percent for the overnight lending facility, three percent for the overnight reverse repurchase facility, and 2.5 percent for the overnight deposit facility.

The BSP also left the reserve requirement ratios unchanged.

The BSP shifted to the interest rate corridor (IRC) last June 3 as part of efforts to enhance the effectiveness of monetary policy.

The decision to maintain policy rates came amid the volatile financial market due to the impending interest rate hike in the US, as well as the referendum on the proposed exit of the UK from the European Union.

Espenilla said monetary authorities observed that prospects for global economic growth have remained subdued with increased downside risks to global activity since the last rate-setting meeting of the Monetary Board last May 12.

He added domestic activity continues to be firm supported by solid private household consumption and investment, buoyant business and consumer sentiment as well as adequate credit and domestic liquidity.

Espenilla, who is also Deputy Governor of the BSP, explained higher fiscal spending committed by the incoming Duterte administration would further boost domestic demand.

The country’s gross domestic product (GDP) growth accelerated to 6.9 percent in the first quarter from the revised 6.5 percent in the fourth quarter of last year due to strong private consumption and robust investment.

He explained latest inflation forecasts indicate that average inflation would likely settle near the lower edge of the two to four percent target this year before rising to the mid-point of the range in 2017 and 2018.

 “The overall balance of risks surrounding the inflation outlook is now deemed to be broadly balanced. With global oil prices recovering, the risk of second round effects from lower oil prices is likely to recede in the period ahead,” Espenilla said.

Espenilla said the slower global economic activity remains a key downside risk to the inflation outlook.

“Given improved rainfall conditions and the shift to neutral weather conditions in the May-July, the upside risks to food and utility prices due to El Niño are also seen to recede in the coming months,” he said.

However, he explained pending petitions for adjustments in electricity rates remain an upside risk to inflation.

“Inflation expectations remain broadly consistent with the inflation target over the policy horizon,” Espenilla said.