BSP keeps rates steady; inflation target stays

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) kept interest rates steady yesterday after considering the potential impact of the rate hike by the US Federal Reserve on global financial market conditions.

BSP Governor Amando Tetangco Jr. said the central bank’s Monetary Board during its last rate setting meeting for 2016 decided to maintain policy 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 country’s policy stance was maintained amid the sustained firmness in domestic economic activity as well as the benign inflation environment.

Tetangco pointed out domestic demand conditions are likely to stay firm on the back of solid private household spending, higher government expenditures and adequate domestic liquidity.

“In addition, the Monetary Board has considered the potential impact of the ongoing monetary policy adjustment in the US on global financial conditions,” he said.

The BSP chief pointed out the Monetary Board also noted that maintaining monetary policy settings at this juncture would give the BSP more time to assess evolving economic developments and calibrate its policy tools as appropriate.

Likewise, he explained latest baseline forecasts indicate average inflation would likely settle below the two to four percent target this year but is seen to return gradually to a path consistent with the target in 2017 and 2018 due to higher oil prices and strong domestic activity.

“The overall balance of risks surrounding the inflation outlook also remains tilted to the upside, owing partly to the pending petitions for adjustments in electricity rates as well as the initial impact of the government’s broad fiscal reform program,” Tetangco said.

He said increased uncertainty in global economic prospects continues to pose a key downside risk to the inflation outlook.

US Fed chair Janet Yellen announced a 25 basis-point hike last week, its second in a decade, bringing interest rates to a range of 0.50 to 0.75 percent after the two-day meeting of the Federal Open Market Committee (FOMC).

The Fed also penned three quarter-point rate hikes next year instead of two as of September that could be followed by three more increases in 2018 and 2019.

BSP Deputy Governor Diwa Guinigundo said the Monetary Board maintained the inflation forecast for this year but raised the projected consumer prices for 2017 and 2018.

Inflation is forecast to average 1.8 percent this year but is uprated to 3.3 percent instead of three percent for 2017 and to three percent instead of 2.9 percent for 2018.

He explained the forecasts for 2017 and 2018 were tweaked due to the higher than expected inflation in November, the impact of the stronger domestic economy, the five percent depreciation of the peso and rising oil prices.

Inflation averaged 1.7 percent in the first 11 months of the year after kicking up to 2.5 percent in November.

On the other hand, the country’s gross domestic product (GDP) growth accelerated to 7.1 percent in the third quarter from seven percent in the second quarter.