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BSP keeps interest rates intact

BSP Governor Nestor Espenilla Jr. said the Monetary Board retained the interest rate on the overnight reverse repurchase facility at three percent as well as the corresponding interest rates on the overnight lending and deposit facilities based on the assessment that inflation outlook remains manageable. File

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) kept interest rates unchanged yesterday, but raised the inflation forecast for 2018 amid rising oil prices, higher liquidity in the financial system and the weak peso.

BSP Governor Nestor Espenilla Jr. said the Monetary Board retained the interest rate on the overnight reverse repurchase facility at three percent as well as the corresponding interest rates on the overnight lending and deposit facilities based on the assessment that inflation outlook remains manageable.

He added the reserve requirement ratio was also left unchanged at 20 percent.

The BSP chief said monetary authorities believe the inflation path would stay within the two to four percent target between 2017 and 2019 despite faster rise in consumer prices mainly due to higher utility rates and fuel prices.

Inflation kicked up to a three-year high of 3.5 percent in October from 3.4 percent in September, bringing the average to 3.2 percent in the first 10 months of the year.

“The balance of risks to the inflation outlook continues to lean toward the upside due to higher crude oil prices,” he said.

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Espenilla pointed out the proposed tax reform of the national government may exert potential transitory pressures on prices.

However, he explained various social safety nets and the resulting improvement in output and productivity are expected to temper the impact on inflation of the comprehensive tax reform program over the medium term.

Meanwhile, the BSP chief said the proposed reform in the rice industry involving the replacement of quantitative restrictions with tariffs and the deregulation of rice imports could temper inflation.

Espenilla added the seven-member board also took note of geopolitical tensions and lingering uncertainty over macroeconomic policies in advanced economies pose downside risks to near-term prospects for global economic growth.

“Nonetheless, the outlook for domestic economic activity remains firm, supported by positive consumer and business sentiment and ample liquidity. Moreover, while credit continues to expand in line with output growth, the Monetary Board remains watchful over evolving liquidity and credit conditions and their implications for price and financial stability,” he said.

For his part, BSP Deputy Governor Diwa Guinigundo said authorities kept the inflation forecast at 3.2 percent in 2017 and 2019.

However, he said the BSP now expects inflation to pick up to 3.4 percent instead of 3.2 percent for 2018 due to higher prices of crude oil, geopolitical tensions, the depreciation of the peso against the US dollar, and the faster rise in consumer prices in September and October.

He said monetary authorities will continue to consider monetary actions but does not have to move in synch with central banks such as the US Federal Reserve that kept rates unchanged but is on track for another rate hike next month.

The US Fed raised benchmark rates in March and June.

“If you look at our inflation forecast, there is very little reason for us to adjust monetary settings at this point in time,” Guinigundo said.

He said there is also enough credit and liquidity in the market so there is no reason for the BSP to change its policy stance at this point.

Latest data showed credit grew 21.1 percent to P6.76 trillion while liquidity in the financial system expanded 14.5 percent to P10.14 trillion in end September.

Chidu Narayanan, economist for Asia at Standard Chartered Bank, said the Monetary Board is seen maintaining a neutral monetary policy stance through 2017.

“We expect inflation to edge up further in 2018 but we maintain our view that the BSP will keep rates on hold near-term, having looked through the transitory increase in inflation earlier this year, as we had forecast,” he said.

Robust domestic demand and the benign inflation environment have allowed the BSP to keep an accommodative policy stance over the past three years as it last raised benchmark rates in September 2014.

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