Tetangco rules out rate hike for rest of the year

Peso remains competitive

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. yesterday said inflation rates will move closer to the upper target band of the 2.0 percent to 4.0 percent range in the third quarter before easing to previous lows.

As such, Tetangco reiterated that based on the data they have now, there is no need to adjust policy rates for the whole of the year on the back of a manageable, albeit rising, inflation average.

“A closer scrutiny of the monthly inflation path will show that inflation increase will be rising until sometime in the third quarter of 2017,” Tetangco said. “And the monthly rates will be very close to the upper path of the target range.” It is not enough to tweak key overnight rates however.

“Even so, our forecast fan suggests that inflation will slow down thereafter,” he added, and fall within the target range for the rest of the year.

Speaking before members of the Management Association of the Philippines on Tuesday for its first economic briefing for the year, Tetangco also commented on the movement of the peso which he said is still very much influenced by external forces, specifically on what the US Federal Reserve may or may not do next.

“The initial impact (is on) foreign exchange volatility so effectively the exchange rate. (But) the depreciation (of the peso) is due to the strong US dollar and the behavior of other currencies… the peso is not the only one moving in that direction.”

Tetangco reiterated that at the R50level to the US dollar, the exchange rate vis-à-vis other currencies remains “more or less stable.” “When you look at the exchange rate, also see how it has performed in the medium term. How it has behaved as against other currencies not just in the US dollar,” he said.

Tetangco said the exchange rate market is a free market and they will only intervene if volatility pressures escalates.

Tetangco also assured that the peso remains a competitive currency, supported by foreign exchange sources from remittances, tourism and the BPO sectors. These are the sources of strength for the peso, he said. "The peso has been broadly stable and has maintained competitiveness."

The currency’s depreciated value as well as increased electricity rates were some of the reasons why inflation rate has risen to 3.3 percent in February. For March, Tetangco expects a range of 3.3 percent to 3.8 percent.

Last week the BSP’s Monetary Board decided not to touch – again and since September 2015 – its policy because the outlook for inflation “remains manageable (and) consistent with favorable growth prospects.”

During the meeting, the BSP cut its inflation forecast to 3.4 percent this year from its previous estimate of 3.5 percent. For 2018, the forecast is also lowered to three percent from 3.1 percent previously.

The central bank reiterated that inflation rate went up in January and February primarily because of food and oil price increases and also due to base effects, however the average rate would still remain within the target band over the policy horizon.