Bangko Sentral keeps policy rates unchanged

Interest rates were kept on hold by the central bank, as expected, but it sounded off on risks stemming from dry weather patterns and uncertainty from overseas that may destabilize prices in the coming months.

After the Monetary Board’s rate-setting meeting Thursday, the Bangko Sentral ng Pilipinas (BSP) said benchmark rates were left untouched even as latest inflation data showed prices moving at a record-low pace.

“Domestic demand conditions remain firm despite lower-than-expected first quarter growth, supported by solid private household and capital spending, as well as buoyant business confidence,” Governor Amando M. Tetangco Jr. said.

The BSP’s main goal is to protect consumers’ purchasing power by keeping prices stable. This is done through adjustments in interest rates, which influence domestic demand. The amount of money circulating in the country is also managed by the BSP to ensure the economy has enough to grow, but not too much to artificially inflate prices.

Inflation in May stood at 1.6 percent, the slowest rate on record. This was below the BSP’s target range of 2 to 4 percent for the year.

May’s low inflation led to a revision of forecasts for this year to 2.1 percent and to 2.5 percent in 2016. The BSP earlier projected that inflation would average 2.3 percent and 2.6 percent in 2015 and 2016, respectively.

“There could be several months where inflation rate may track close to or a little bit below the lower bound of the inflation target range,” BSP Monetary Policy Sub-Sector managing director Francisco Dakila Jr. said at a briefing.

In the meantime, gross domestic product (GDP) rose by 5.2 percent in the first quarter, which also contributed to the downward revision in inflation projections. First quarter growth fell short of the government’s official goal of at least 7 percent.

Officials were wary of possible developments later this year that may push prices up. For instance, a reversal in oil prices in international markets may lead to more expensive fuel later in the year. Dry weather caused by the ongoing El Niño phenomenon may also lead to widespread damage to farmlands, putting pressure on the country’s food supply.

Dakila said there remained enough cash in circulation to keep the economy moving. The main reasons for the slower expansion in the first quarter were “supply side” issues and the state’s underspending that the BSP has little power over.

Weak demand for Philippine exports and slow spending by the national government were tagged by economic managers earlier this year as the main reasons for the January to March dip.

“If you look at the various components of demand, … (they are) still respectable,” Dakila said, noting that consumer consumption rose by 5.4 percent in the first quarter, while capital formation or investments grew 11.8 percent.