BSP keeps rates intact

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) left interest rates untouched yesterday despite the strong upside price pressures that prompted monetary authorities to raise the inflation forecast to above its medium term target.

BSP managing director Francisco Dakila Jr., reading the statement of BSP Governor Nestor Espenilla Jr., said the central bank’s Monetary Board decided to maintain the interest rate on the overnight reverse repurchase facility steady at three percent.

Dakila said the corresponding interest rates on the overnight lending and deposit facilities were also kept unchanged.

However, the policy setting body of the central bank raised its inflation forecast to 4.3 instead of 3.4 percent for this year and to 3.5 instead of 3.2 percent for 2019.

The BSP has set an inflation target range of two to four percent between 2018 and 2020.

While latest baseline forecasts show higher inflation outturns for 2018.

Inflation kicked up to its highest level in more than three years to four percent last month from 3.3 percent in December due to the impact of the first round effects of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law.

“The higher inflation in January is also due to better enforcement of tax laws on tobacco, as well as temporary increases in prices of selected food items such as fish and vegetables,” he added.

Dakila told reporters the latest forecast includes the impact of the tax reform law after it was signed by President Duterte last Dec. 19, the higher outturn for January, and the continued rise in the global crude oil prices.

However, Dakila explained monetary authorities expect the impact on inflation of the implementation of the new tax law last Jan. 1 as transitory in nature.

“It should b emphasized that although the inflation number for 2018 has been adjusted upwards, the supply-side factors is of transitory nature. By March next year we should be back within the inflation target band,” he told reporters.

According to Dakila, any second round effects would appear to be well contained as there are mitigating measures such as the Pantawid Pamilyang Pilipino Program (4Ps), coordination among various government agencies in the better implementation of the tax law, as well as the better monitoring of prices.

The discussion on the reserve requirement ratio (RRR) of banks currently pegged at 20 percent – the highest in the region – took a back seat as monetary authorities decided to focus on the policy rate.

Dakila said the BSP expects a moderate increase in inflation perhaps above the upper bound of the two to four percent target, but is expected to self-correct overtime.

BSP Deputy Governor Maria Alamasara Cyd Tuano-Amador said the impact of the TRAIN law on inflation are supply side and considered short-lived and are expected to recede over time.