MANILA, Philippines–Monetary authorities are expected to keep interest rates at near-record lows for the rest of the year, with low inflation providing space for policies supportive of faster economic activity.
Capital Economics, a think tank, said any acceleration in inflation this year would be gradual, leaving no reason for the Bangko Sentral ng Pilipinas (BSP) to adjust.
“Despite the recent drop in inflation, the [BSP] is unlikely to join a number of other central banks in the region that have loosened monetary policy since the start of the year,” Capital Economics said in a new note.
Just this week, the central banks of South Korea and Thailand slashed benchmark interest rates to provide a boost to economic growth amid cheap fuel. India’s and China’s monetary authorities have also cut rates.
In February, inflation in the Philippines stood at 2.5 percent, similar to January’s 2.4 percent, which was at the time the lowest in five years.
BSP Governor Amando M. Tetangco Jr. has said interest rates may be kept on hold “for most of 2015.”
Divergence in policy settings tends to create volatility in financial markets and cross-border investment flows—factors that the BSP is wary of.
Keeping rates higher relative to the rest of the region may result in higher investment flows to the country, which could in turn lead to higher money supply growth that would stoke inflation.
The more money that comes in to the country also means the impact of this same cash leaving for abroad will be greater.
Higher capital inflows, and the inevitable divestment of these placements, may also result in volatility in the local currency, which affects overall consumer prices.
Despite these concerns, Capital Economics said the forecast for consumer price inflation remained comfortably toward the lower end of the BSP’s target range.
“Although we expect inflation to rise over the coming year, the increase will be gradual, and we expect the BSP will keep rates on hold for the rest of the year,” the firm said.