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Key policy rates seen to stay unchanged

/ 12:32 AM September 17, 2016

The Monetary Board will unlikely tweak policy rates next week amid a low inflation environment, DBS Bank Ltd. said Friday.

In a note to clients, DBS economist Gundy Cahyadi said DBS expected the Bangko Sentral ng Pilipinas (BSP) to raise the policy rate by mid-2017 to 3.5 percent from 3 percent at present.

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Cahyadi, however, said there was “no reason why the BSP should act for now” as there was no pressure on inflation.

The Monetary Board, the BSP’s highest policy-making body, will tackle policy at its meeting on Sept. 22.

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“August core inflation came in at 2 percent year-on-year, the highest year-to-date. Core inflation seems to have bottomed out in the second quarter. Not only has underlying demand remained strong, but price expectations also seem to have inched up in recent months alongside the rise in food prices,” Cahyadi noted.

“Food inflation is currently trending around 3 percent, offsetting some of the drag prevalent in the housing/utilities and transport components of the CPI [consumer price index]. Given that the distortion from low oil prices is likely to dissipate going into 2017, expect headline CPI inflation to average 2.6 percent next year, up from a projected 1.6 percent this year. Core inflation is also set to be steady within the 2.5-3 percent range by the midyear,” he added.

As of the end of August, headline inflation averaged 1.5 percent, below the government’s 2 to 4 percent target for 2016.

BSP Governor Amando M. Tetangco Jr. said “there appears to be no strong need to change policy stance.”

Cahyadi said “it is also clear that the BSP would want to continue draining excess liquidity from the system.”

“Note how investment growth continues at doubledigit, and that loan growth is above 15 percent once again. Expect the monetary policy bias to turn increasingly hawkish going into 2017, especially when we also expect the Fed to play catch-up in adjusting its rates,” he said.

“Look for the BSP to continue to drain excess liquidity from the system. This is done by gradually increasing the volume of its term deposit facility auction in the coming months to pull short-term rates closer to the current policy rate of 3 percent,” he said. Ben O. de Vera

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