BSP keeps interest rates steady, but raises inflation forecast for 2018

The Bangko Sentral ng Pilipinas (BSP) has kept interest rates steady but raised the inflation forecast for 2018 to 3.4 percent on expectations of a further increase in global oil prices as well as depreciation of the peso.

On Thursday, Governor Nestor A. Espenilla Jr. said the Monetary Board, the BSP’s highest policymaking body, decided to maintain the policy rate at 3 percent as well as leave the other key rates and reserve requirement ratios unchanged because “the inflation environment remains manageable.”

“While inflation has trended higher due mainly to higher utility rates and fuel prices, latest forecasts continue to show the future inflation path staying within the government’s 2-4 percent target range for 2018-2019. Inflation expectations also remain anchored close to the midpoint of the inflation target range over the policy horizon,” Espenilla said.

According to Espenilla, “The balance of risks to the inflation outlook continues to lean toward the upside due to possible higher crude oil prices. The proposed tax reform program of the national government may exert potential transitory pressures on prices, although various social safety nets and the resulting improvement in output and productivity are also expected to temper the impact on inflation over the medium term.”

BSP Deputy Governor Diwa C. Guinigundo told reporters that while the Monetary Board kept the inflation forecasts it made last September – 3.2 percent for 2017 to 2019 – the projected rate for 2018 was raised to 3.4 percent.

Guinigundo attributed the higher inflation forecast for 2018 to the following: expectations of higher oil prices on the back of a cut in production by Organization of the Petroleum Exporting Countries (Opec) members as well as geopolitical tensions among oil-producing countries in the Middle East, which are expected to affect global supply; and increase in domestic liquidity as continuing economic activity will require an increase in credit.

Also, Guinigundo said the peso’s depreciation will push inflation higher in 2018. Most economists see the peso further weakening in 2018 partly due to concerns on the current account deficit as a result of a surge in imports.

Espenilla said that “geopolitical tensions and lingering uncertainty over macroeconomic policies in advanced economies pose downside risks to near-term prospects for global economic growth.”

“Nonetheless, the outlook for domestic economic activity remains firm, supported by positive consumer and business sentiment and ample liquidity. Moreover, while credit continues to expand in line with output growth, the Monetary Board remains watchful over evolving liquidity and credit conditions and their implications for price and financial stability” Espenilla said.

“Based on these considerations, the Monetary Board believes that prevailing monetary policy settings continue to be appropriate. The BSP will continue to monitor price and output developments for any risks to the inflation outlook and will adjust its policy settings as necessary to ensure stable prices and sustainable economic growth,” he added. /kga