BSP hints at policy rates cut in next meeting

The Bangko Sentral ng Pilipinas hinted it might further cut its key policy rates, which were already at their record lows, to prevent inflation from falling below target range.

BSP Governor Amando Tetangco Jr. said an inflation rate that was too low was as bad for the economy as an excessively high inflation rate.

He said the central bank’s job was to prevent inflation not only from exceeding the target but also from falling below the target.

Tetangco on Tuesday said the BSP had room to tweak policy as he projected the annual inflation in July to hit between 2.6 percent and 3.5 percent, reinforcing the bank’s view that inflation would average near the lower end of its 3-5 percent target this year.

In June, the inflation rate hit 2.8 percent, bringing the first semester average to 3 percent.

“The inflation average over the policy horizon is still expected to fall closer to the lower end of our target range,” he told reporters in a mobile text message.

“Our current view is that there is some scope to adjust monetary policy settings to protect the inflation target on the downside,” he said.

He added that the BSP would continue to monitor global developments, like movements in international commodity prices and shifts in investor appetite, that might affect capital flows to assess their potential impact on domestic inflation and growth.

The BSP’s inflation projection for July will bring the average rate for the first seven months of the year to between 2.9 and 3.1 percent.

“The higher utility rates and increased international oil prices could have been offset by the peso appreciation and the decline in the domestic price of liquefied petroleum gas,” Tetangco said.

The peso has appreciated this year due mainly to the strong inflow of foreign portfolio investments. Earlier this month, the local currency hit a four-year high of 41.68 against the US dollar.

The rising peso makes imported goods cheaper in local currency terms, thereby pulling down domestic prices.

The increase in domestic investments, which boosted supply of consumer products, also helped temper inflation so far this year.

The central bank’s key policy rates, which influence commercial interest rates, now stand at record lows of 4 percent for overnight borrowing and 6 percent for overnight lending.

The Monetary Board of the BSP is scheduled to meet on Thursday to decide on what policy action to take.

A reduction in key policy rates is expected to push demand for bank loans, which can help boost consumption and accelerate inflation.

Tetangco’s remarks were the latest in a string of dovish comments by policymakers in recent weeks, which appeared to open the door to another rate cut as the global economy slows.

Most analysts, however, still expect the central bank to leave rates unchanged at its policy meeting on Thursday.

Eleven of 12 economists polled by Reuters earlier this week saw no change in rates on Thursday. At least two changed their view to a cut after Tetangco’s comments, but the majority still expected it to hold off any further easing, arguing that domestic demand remained strong and capital inflows might be better managed by nonrate tools.

“We earlier maintained that the bank had the room to lower the benchmark rate given a tame inflation outlook, though with growth still holding up well, there is little urgency to tweak rates as yet,” said Radhika Rao, economist at Forecast in Singapore, who stuck to her view that the bank would remain on hold for now.

The overnight borrowing rate has gone down to a record low 4 percent after the BSP cut policy rates in January and March to shield the economy from the global slowdown.—With a report from Reuters