BSP steadies policy until at least Feb., maintains inflation forecasts
THE BANGKO SENTRAL ng Pilipinas (BSP) held fire on monetary policy yesterday as inflation remains within target and with economic growth remaining upbeat, which came despite a fresh rate hike in the United States that would trigger rising global yields.
As expected, the Monetary Board kept borrowing rates unchanged during its eighth and final policy review for 2017.
Rates stayed at 3.5% for the overnight lending rate, 3.0% for the overnight reverse repurchase rate, and 2.5% for overnight deposit.
The BSP will hold its next monetary policy review on Feb. 8, 2018.
The central bank last hiked key rates in September 2014, although procedural cuts were introduced in June 2016 for the shift to an interest rate corridor scheme.
“The Monetary Board’s decision is based on its assessment that the outlook for the inflation environment has been broadly unchanged,” BSP Governor Nestor A. Espenilla, Jr. said in a statement, adding that domestic economic activity has remained firm.
Inflation averaged 3.2% in the 11 months to November, with last month’s 3.3% pace reflecting the first slowdown in five months.
The 11- month average also settled within the 2- 4% target range set by the central bank and matches the BSP’s forecast for 2017.
The BSP’s decision followed a third rate increase for 2017 introduced by the US Federal Reserve during its two-day review ending Wednesday that has long been factored in by markets amid the US’ slow but steady economic recovery. US monetary policy makers increased rates by another 25 basis points at the end of their
Dec. 12-13 review. Fed officials also maintained their estimate of three more interest rate increases in 2018 and 2019.
Central bank officials have said that they need not move in sync with the Fed, as they focus more on domestic developments in setting interest rates.
“[T]here’s hardly any need to tighten monetary policy. We are saying this because the so-called overheating concerns due to high credit growth is at least misplaced. The economy continues to grow and an economy that is growing needs robust provision of domestic credit,” BSP Deputy Governor Diwa C. Guinigundo said in a briefing yesterday.
The BSP also kept the 20% reserve requirement ratio (RRR) on Thursday, but pointed out that it remains to be a “medium-term commitment” of the monetary authority.
“Until such time we are prepared to ease monetary policy and if the capital markets are sufficiently developed... that should usher in the proper environment for considering the possible reduction in the reserve requirement,” Mr. Guinigundo said.
Economists tapped in a Business-World poll said an RRR cut may be introduced next year.
UBS economist Alice Fulwood said in a conference call yesterday that the BSP will likely hike policy rates three times in the second semester of 2018, in order to apply the brakes on inflation.
Capital Economics said the BSP may have room to keep rate adjustments on hold even all through 2018, and dismissed fears about double-digit bank lending growth as this merely supports additional production activities.
“[ W]e believe next year will be more momentous,” HSBC Global Research said separately, noting that “market demand for liquidity continued to lift TDF (term deposit facility) rates and inflationary risks for 2018 are tilted to the upside.”
“We expect a 100bp cut to the RRR in 1Q18 to inject liquidity and fulfill policy objectives, and a 25bp policy rate hike in 2Q to limit inflationary risks,” HSBC Global Research economist Noelan Arbis said in a note.
“We do agree with the BSP that overheating concerns are misplaced, which is why we do not expect another rate hike until 3Q19 if one were to happen in 2Q18.”
INFLATION STEADY
The BSP also maintained inflation forecasts until 2019, even as overall price hikes are likely to pick up amid rising oil costs and the tax reform program that will be implemented starting January.
The BSP kept its annual inflation estimates at 3.2% this year, 3.4% next year and 3.2% in 2019.
Mr. Guinigundo said oil prices of up to $65 per barrel “would not be enough to upset” inflation to go beyond four percent.
Higher levies from the tax reform program that Congress ratified last Wednesday are also expected to prod price hikes further, even as the impact should be “transitory.” Resulting added revenues will spur economic output by supporting infrastructure projects.