Within-target inflation thus far will allow monetary authorities to keep key rates steady at the first policy meeting to be chaired by Bangko Sentral Governor Nestor Espenilla Jr., London-based economic research firm Capital Economics said.
“The BSP has left interest rates unchanged since June last year. In its last statement, the central bank gave little indication that it was in any hurry to change stance again anytime soon. As such, we expect monetary policy will be left unchanged on Thursday,” Capital Economics said in a report, referring to the meeting of the Monetary Board, the BSP’s highest policy-setting body, on the monetary policy stance on Aug. 10.
The BSP in June last year implemented operational adjustments ahead of the implementation of the interest rate corridor (IRC), which is aimed at bringing market interest rates closer to the policy rate.
The overnight lending facility—the upper bound of the corridor—was cut to 3.5 percent from the former repurchase (RP) facility of 6 percent while the policy rate or reverse repurchase (RRP) facility was converted into overnight, with its rate lowered to 3 percent from the previous RRP facility of 4 percent.
The BSP kept the overnight deposit facility or the former special deposit accounts (SDA) rate of 2.5 percent, which serves as the lower bound of the corridor.
At present, “a rate hike looks unnecessary,” Capital Economics said.
“As we had expected, inflation has steadily come down from its March peak of 3.4 percent year-on-year to 2.8 percent in July. Meanwhile, a bright global environment, strong credit growth and buoyant business and consumer sentiment mean there is little need for more supportive policy,” Capital Economics explained.
As of end-July, inflation averaged 3.1 percent, within the government’s 2-4 percent target range for 2017.
Last Friday, Espenilla said in a statement that the BSP continued to see a manageable inflation outlook over the policy horizon after taking into consideration the latest inflation reading in July.
“Inflation is projected to remain close to the midpoint of the national government’s range target of 2-4 percent in 2017 to 2019. The inflation path will be supported by the continued strength of the domestic economy as well as negative base effects in the last four months of 2017,” Espenilla added.
While the BSP was also concerned about the current rapid growth of private sector credit, Capital Economics said that for the time being, “we think it is more likely to respond by tightening macro prudential measures than by raising interest rates.”