Interest rates, inflation seen subdued for 2016

Borrowing costs may increase, but not just yet, according to the Bangko Sentral ng Pilipinas (BSP).

The monetary regulator said domestic interest rates were expected to remain low for the foreseeable future, providing a good opportunity for Filipino consumers to take advantage of what it described as “ample liquidity in the financial system.”

In the same vein, the BSP said the prices of basic goods and services were expected to remain stable for the rest of this year, but may creep upward toward the latter part of 2017 due to potential increases in the prices of electricity and petroleum.

In a press briefing, BSP Deputy Governor Diwa Guinigundo described these “upside risks” to inflation as the possible increases in utility rates and possible increases in taxes on petroleum products.

“I think these two are not factored into the baseline forecast of the BSP, and that is something that would bring the forecasts higher for the next two years,” he said, adding the regulator also sees “continued robustness” in the economy “that will translate to stronger domestic demand”—a potentially inflationary condition.

BSP was also wary of any weakness in the peso going forward, which could also fuel inflation. The central bank expects the local currency to trade between P45 and P48 to the dollar “for the next few years.”

“So for the second half of 2016, we expect inflation to revert to around the lower end of the target of 2 to 4 percent,” Guinigundo said. “And for the rest of the horizon 2017 and 2018, we would expect the factors I cited could further increase the inflation readings in the next few years.”

Last Thursday, the Monetary Board maintained BSP’s key overnight reverse repurchase rate at 3 percent, along with other interest rates and reserve requirement ratios.

“The Monetary Board’s decision is based on its assessment that the inflation environment remains manageable,” BSP Governor Amando Tetangco Jr. said. “Latest forecasts continue to indicate that average inflation is likely to settle slightly below the 3 percent, plus or minus 1-percentage point target range in 2016 and rise toward the mid-point of the target range in 2017 and 2018.”