BSP holds off rate changes

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) decided yesterday to keep interest rates steady amid the sustained firmness in domestic economic activity as well as the benign inflation environment. 

BSP Governor Amando Tetangco Jr. said the Monetary Board 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. 

He added the BSP also left the reserve requirement ratios unchanged at 20 percent. 

“The Monetary Board also recognized that while global economic conditions have remained subdued since the previous meeting, trends in domestic economic activity show sustained firmness, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity,” Tetangco said. 

Tetangco said higher public spending is expected to boost domestic demand given the country’s fiscal space.

Furthermore, Tetangco said the Monetary Board’s decision was based on its assessment that the inflation environment remains manageable.  

Inflation averaged 1.5 percent in the first eight months after easing to 1.8 percent in August from 1.9 percent in July. The BSP has set an inflation target of between two and four percent for 2016 to 2018.

“At the same time, the overall balance of risks surrounding the inflation outlook appears tilted to the upside, with pending petitions for adjustments in electricity rates along with the proposed adjustment in the excise tax rates of petroleum products and the potential second-round effect on transport fares,” he said.

According to Tetangco, slower global economic activity poses the main downside risk. 

The economy grew by seven percent in the second quarter from 6.8 percent in the first quarter bringing the average expansion to 6.9 percent in the first half. 

Economic manages penned a GDP growth of between six and seven percent this year. 

“With these considerations, the Monetary Board believes that current monetary policy settings remain appropriate. At the same time, increased uncertainty over prospects for growth and monetary policy action in major advanced economies warrants prudence in policy settings,” Tetangco said. 

For his part, BSP Deputy Governor Diwa Guinigundo said monetary authorities slashed this year’s inflation forecast to 1.7 percent from the original 1.8 percent. 

He cited the lower actual August inflation rate as well as the moderation in economic activities in the third quarter due to the impact of the rainy season as well as the moderation of the moderation of the impact of election spending. 

Furthermore, he added authorities believe the approval of the power rate adjustment would be delayed. 

“If we take these all, the 2016 inflation forecast will show some downward adjustment to 1.7 percent from 1.8 percent,” he said. 

Guinigundo pointed out the inflation forecasts of 2.9 percent for 2017 and 2.6 percent for 2018 were retained. 

According to him, it is still very difficult to assess the impact of the proposed higher excise tax on fuel products that could result in a P6 per increase in the prices of gasoline and diesel.  

“We do expect some second round effects not only from fuel price but also from transport fare. It is very difficult at this point to talk about the impact. Notwithstanding the adjustment in fuel prices and transport fares, the inflation would still be within the target for 2017 and 2018,” he said.