BSP keeps policy settings steady on benign inflation

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By Melissa Luz T. Lopez, Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) left borrowing rates unchanged yesterday, with new Governor Nestor A. Espenilla, Jr. opting to keep the status quo as inflation remains benign and with domestic activity fairly robust.

As widely expected, the Monetary Board maintained its policy stance on Thursday for the 23rd straight meeting. The central bank kept policy settings at 3.5% for the overnight lending rate, 3% for the overnight reverse repurchase rate, and 2.5% for the overnight deposit rate during its fifth review for this year.

Reserve requirement ratios imposed on banks were likewise kept steady.

“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,” Mr. Espenilla said in a press briefing after presiding the rate-setting meeting.

“The outlook for domestic economic activity continues to be firm, supported by buoyant consumer and business sentiment and ample liquidity.”

However, the central bank chief said prices may still move upward in the coming months, with higher duties eyed under the government’s tax reform plan seen to push commodity costs higher.

On the other hand, volatilities in the global scene could weigh on local prospects, such as policy uncertainty in advanced economies coupled with rising geopolitical tensions which could lead to slower-than-expected global growth.

Market players are likewise watching out for hints from the US Federal Reserve as to when it will start unwinding its $4.2-trillion bond portfolio and on its next rate hike.

Mr. Espenilla previously said the BSP won’t have to match the Fed’s tightening moves, given that domestic conditions remain the biggest concern for the monetary authority.

The BSP has kept policy rates steady since a hike in September 2014, except for procedural cuts announced in June last year to signal its shift to an interest rate corridor scheme. Since then, the central bank employs weekly term deposit auctions to siphon excess liquidity and influence market rates.

Mr. Espenilla assumed the top central bank post on July 3, with his appointment broadly assuring policy continuity among industry players.

Analysts said the BSP’s decision was expected, although flagged that rapid credit growth could be a concern for the central bank.

ANZ Research economist Eugenia Fabon Victorino said elevated credit growth at a time of steady yields makes policy tightening “inevitable” for the BSP, as she expects a 25-basis-point increase by yearend.

Meanwhile, Capital Economics senior Asia economist Gareth Leather said the regulator will likely address the loan growth through macro-prudential measures rather than interest rate tweaks.

“The outlook for inflation doesn’t warrant tighter policy… There is certainly no need for monetary policy to be loosened to support growth,” Mr. Leather said in a report released after the decision.

Rising global oil prices pushed the central bank’s inflation forecasts higher for the next three years to 2019, despite the milder pace of price increases recorded in June and July.

BSP Deputy Governor Diwa C. Guinigundo said the central bank now expects commodity prices to rise by 3.2% this year, higher than the 3.1% forecast announced during their June 22 policy meeting. Inflation is also seen picking up to 3.2% next year and 3.1% by 2019, up from previous forecasts of 3% annually, respectively.

Inflation averaged 3.1% for the first seven months, logging within the central bank’s 2-4% target range.

Mr. Guinigundo added that domestic liquidity and credit conditions, coupled with price pressures drawn from a weaker exchange rate as the peso remains slumped versus the dollar, were also factored into the higher inflation projections.

Analysts expect the BSP to stay on hold over the near term, with some saying the fourth quarter of this year may be the earliest time for a rate hike to be on the table. Others, however, see the central bank keeping rates steady until early 2018.

Mr. Espenilla assured that the central bank “continues to pay close attention” to growth and liquidity dynamics as it ensures price and financial stability.

The BSP will hold its next rate-setting meeting on Sept. 21.