BSP keeps policy rates steady but hikes inflation forecasts for 2017-2019

Monetary authorities on Thursday kept key policy rates steady but slightly raised inflation forecasts for the next three years mainly on expectations of higher oil prices.

In a press conference after the first Monetary Board meeting on the monetary policy stance that he chaired, Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla Jr. said the BSP’s highest policy setting body maintained the policy rate or the overnight reverse repurchase (RRP) facility at 3 percent.

The overnight lending and deposit facilities as well as the reserve requirement ratios were also unchanged.

“The Monetary Board’s decision is based on its assessment that the inflation environment remains manageable. While inflation forecasts have risen slightly due to the recent increase in global oil prices, the future inflation path continues to be within the target for 2017-2019,” Espenilla said.

BSP Deputy Governor Diwa C. Guinigundo said they slightly jacked up their yearly inflation forecasts for the period 2017 to 2019.

For 2017, the forecast was increased to 3.2 percent from 3.1 percent previously; 3.2 percent from 3 percent previously for 2018; and 3.1 percent from 3 percent for 2019.

Guinigundo said that besides expectations of higher petroleum prices, the increase in domestic liquidity as well as the peso’s depreciation would push the rate of increase in prices of basic goods faster.

But Espenilla said “inflation expectations remain firmly anchored close to the midpoint of the government’s 2-4 percent target over the policy horizon.”

As of end-July, inflation averaged 3.1 percent, within the government’s target range for 2017.

According to Espenilla, “the Monetary Board also recognizes that the balance of risks to the inflation outlook continues to be on the upside.”

“While the proposed tax reform program may exert potential transitory ‘pressures on prices, various social safety nets and the resulting improvement in productivity will likely temper the impact on inflation over the medium term. At the same time, while output prospects for the global economy have improved, downside risks to external demand remain, due in part to geopolitical tensions and lingering uncertainty over macroeconomic policies in advanced economies,” Espenilla said.

“The outlook for domestic economic activity continues to be firm, supported by buoyant consumer and business sentiment and ample liquidity. Moreover, as credit activity expands in line with output growth, the economy’s improving absorptive capacity is likewise seen to be sustained, thus mitigating inflation pressures over the long run,” Espenilla added.

The BSP chief nonetheless said that the Monetary Board “continues to pay close attention to the evolving economic growth and liquidity conditions and their implications for price and financial stability.”

“With these considerations, the Monetary Board believes that prevailing monetary policy settings continue to be appropriate. Looking ahead, the BSP will remain vigilant against any risks to the inflation outlook and will adjust its policy settings as needed to ensure that future inflation stays aligned with the medium-term target while being supportive of sustainable economic growth,” according to Espenilla.

In a note to clients, London-based economic research firm Capital Economics said the Monetary Board decision “came as no surprise.”

“Looking ahead, we think the central bank will be in little rush to adjust monetary policy. The outlook for inflation doesn’t warrant tighter policy,” Capital Economics senior Asia economist Gareth Leather said.

“Although the economy has slowed a little over the past year, it is continuing to grow at a decent pace. There is certainly no need for monetary policy to be loosened to support growth,” he explained.

However, Leather said “one area of concern is the rapid pace of credit growth” although he said “we doubt this will push BSP to raise rates.”

“The most likely response is that it will tackle these risks, which are mainly concentrated in the real estate sector, with targeted macro-prudential measures,” he added.

For Capital Economics, the BSP will likely keep the policy rate steady until next year. JE