BSP keeps policy rates steady

On robust domestic demand, manageable inflation

MANILA, Philippines – The Bangko Sentral ng Pilipinsas (BSP) decided yesterday to keep key interest rates steady amid the robust domestic demand and manageable inflation environment.

“The Monetary Board’s assessment of manageable inflation dynamics and robust growth conditions continue to support steady monetary policy settings,” BSP Governor Amando Tetangco Jr. said.

This was the 11th straight policy-setting meeting since October 2014 wherein the BSP has decided to keep policy rates untouched.

The overnight borrowing rate is currently pegged at four percent, while the overnight lending rate is at six percent. The interest rates on special deposit accounts remained at 2.5 percent, while the reserve requirement ratios were left unchanged.

Tetangco said inflation is expected to settle within the BSP target of between two and four percent for this year and next year.

“The Monetary Board also noted the risks surrounding the inflation outlook have shifted slightly to the downside,” Tetangco said.

Tetangco said downward pressures on inflation could arise from slower-than-expected global economic activity and potential second-round effects from lower international oil prices.

On the other hand, he said upside risks could come from the impact of prolonged El Niño dry weather conditions on food prices and utility rates as well as pending petitions for power rate adjustments.

BSP Deputy Governor Diwa Guinigundo said the Monetary Board slashed its inflation forecast to 2.2 percent instead of 2.4 percent but retained next year’s projection at 3.2 percent.

Guinigundo cited the roll back in the minimum fares for jeepneys to P7 from P7.50 last January as well as the lowering of the forecast for Dubai crude oil to $31.62 per barrel instead of $44.90 per barrel this year and to $37.53 per barrel instead of $50.29 per barrel next year.

Guinigundo said inflation turnout at 1.5 percent for December and 1.3 percent for January were lower compared to the forecast of the Monetary Board.

Tetangco said domestic demand remained robust after economy grew by 6.3 percent in the fourth quarter of last year from 6.1 percent in the third quarter.

 “At the same time, the Monetary Board observed that domestic demand conditions are likely to stay firm, supported by solid private household and capital spending, buoyant market sentiment, and adequate domestic liquidity,” he said.

The BSP chief added the BSP also considered that the lingering uncertainty over economic growth prospected across the globe could continue to drive volatility in the global financial markets.

US Federal Reserve chair Janet Yellen said the body is looking at gradual rate increases after hiking its near-zero interest rates by 25 basis points last Dec. 16.

 “The BSP is looking at the same external concerns as the Fed is. Our own assessment is that domestic conditions remain sufficiently liquid and aggregate demand is fairly robust, hence no need to provide further support to the domestic economy right now, especially as the inflation path continues to show this will move to within target in the next few months,” Tetangco said.

Guinigundo said the country’s monetary policy stance remains appropriate but noted the need for higher government spending and faster implementation of major infrastructure projects under the public private partnership (PPP) scheme.

 “The economy does not need more monetary support. What the economy needs is perhaps more spending by the government at an accelerated pace in implementing PPP projects, and the private sector also needs to invest and produce,” he added.

Eugenia Fabon Victorino, economist at the Australia and New Zealand Banking Group, said the “BSP remains happily on the sidelines of a well-behaved economy as widely expected.”

Victorino said ANZ Bank sees a slow rise in headline inflation over 2016 and 2017 as favorable base effects from low commodity prices wane.

 “We expect little risk of inflation breaching the upper band of the central bank’s target over the next two years,” she added.