Rates maintained but inflation rate forecasts trimmed
THE BANGKO SENTRAL ng Pilipinas (BSP) kept monetary settings unchanged at its meeting yesterday, with policy makers seeing no need to infuse fresh stimulus at a time of strong domestic activity and manageable inflation.
As expected, the Monetary Board left policy settings at 3.5% for the overnight lending rate, three percent for the overnight reverse repurchase rate and 2.5% for the overnight deposit rate during its second review for the year. Reserve requirement ratios imposed on banks also stood steady.
“The Monetary Board’s decision is based on its assessment that the outlook for inflation remains manageable, consistent with favorable growth prospects,” BSP Governor Amando M. Tetangco, Jr. told reporters in a press briefing yesterday.
“The Board emphasized that domestic economic activity is projected to stay firm, supported by buoyant household consumption and private investment, increased government spending, and ample credit and liquidity.”
The Philippine economy grew 6.8% in 2016 on the back of an investment surge and robust consumer spending,
falling within the government’s 6-7% target. This year, the state expects economic growth to clock 6.5-7.5%.
“We also expect strong domestic demand, and that means there’s very little need for additional monetary support or stimulus,” BSP Deputy Governor Diwa C. Guinigundo added.
The BSP’s decision came a week after the United States Federal Reserve introduced a 25-basis-point increase in borrowing rates, a move said to have already been “priced in” by market players.
Mr. Tetangco previously said that the BSP would not have to move in sync with the Fed as policy rates here remain supportive of economic activity.
INFLATION FORECASTS TEMPERED
The BSP also trimmed its inflation forecasts for this year and 2018, citing “beneficial” effects from the removal of tariffs on rice imports despite prevailing upside pressures on general consumer prices.
Mr. Guinigundo said the central bank now expects 2017 inflation to average 3.4%, a tad slower than its previous 3.5% estimate. The 2018 forecast was likewise scaled down to three percent from the 3.1% pencilled at monetary authorities’ Feb. 9 meeting in the face of still relatively low global and domestic oil prices and expectations of a slower money supply growth.
The BSP officials said inflation remains “manageable” as it stays within target, despite a spike seen last month.
February inflation hit a two-year-high 3.3% on the back of higher prices of food, non-alcoholic drinks. This brought the year-to-date average to three percent, at the mid point of the central bank’s 2-4% target band.
In particular, Mr. Guinigundo cited the looming removal of the quantitative restrictions on rice due to lapse in July as “beneficial” for inflation. Rice makes up nearly a tenth of the theoretical basket of goods and services widely used by a typical household that is used to compute inflation. Under the looming arrangement, individuals and businesses may import rice but will pay a 35% tariff.
“Whatever is collected from the tariff on rice imports will be funnelled back to the agriculture sector to increase productivity… We would expect that this is going to be beneficial to the agriculture sector and if this is going to translate into higher production, then this should also be positive for domestic inflation,” Mr. Guinigundo added.
He also said that the central bank has priced in the approval by the fourth quarter of the first tranche of the Finance department’s tax reform plan, with a “staggered” implementation of the higher excise taxes on fuel expected to drive inflation faster.