BSP will keep rates unchanged in Q4

With a benign inflation rate until December and a relatively contained money supply growth, the Bangko Sentral ng Pilipinas (BSP) is not expected to adjust monetary policy stance in the fourth quarter.

In the latest “Market Call” report of Metrobank unit First Metro Investment Corp. (FMIC) and research partner, the University of the Asia Pacific (UA&P), the slowed rise of inflation numbers in the last three months of the year will keep rate steady.

“We believe that the Monetary Board (of the BSP) will continue to hold policy rate steady in the fourth quarter, anchored also on weak uptick in inflation. Besides, the acceleration in the money growth has remained within the 10 percent to 16 percent range,” according to the FMIC-UA&P.

The report forecast inflation for the month of October will likely drop to 3.3 percent compared to September’s actual 3.4 percent. Adjusting prices of domestic oil and electricity rates will further decrease the rate to three percent in November and move up to 3.1 percent in December.

The peso-US dollar exchange rate will stay stable, the report added, keeping to the R51-range, from R51.23:$1 until November to R51.48 in December. “The exchange rate will again experience more upward pressure as the US dollar resumes its ascent and the differential between US and peso treasury yields narrows slightly.”

The peso’s current weakness – which they expect will lose about 6.3 percent – will not overly impact on the inflation path, FMIC-UA&P economists said.

“Is the peso depreciation adding much to the inflationary pressure? Its main impact is on the transport subindex, which since June 2016 has accelerated from 2.3 percent year-on-year to 4.8 percent,” the report explained.

The transport sector represents about 7.8 percent of the consumer price index basket. So far, the report noted that the increase in inflation to 3.4 percent in September – from 3.1 percent in August and 2.9 percent in July – has aded 0.2 percent to the inflation rate.

FMIC-UA&P said this is “fairly consistent” with their computation that a 10 percent peso depreciation will only add 0.4 percent to 0.5 percent points to inflation. “We project an average depreciation of 6.3 percent for the full year that could translate to some 0.2 percent to 0.3 percent additional inflation for the entire year. That implies only a minor addition up to year end.”

“With this benign inflation outlook,” the report added, “we see the BSP maintaining the status quo with respect to its policy rate, the related interest rates, and reserve requirements for the rest of the year.”

During the September 21 Monetary Board policy meeting, the central bank did not revise its previous 2017, 2018 and 2019 inflation forecasts of 3.2 percent.

The Metrobank-affiliate report has updated some of its outlook but still expect a 6.7 percent to 7.1 percent GDP growth in the third quarter and the fourth quarter – “despite much political noise within and outside the Philippines.”

“We don’t see much change in the growth narrative, as the economy continues to emit bright lights,” it added.

Last Friday the BSP released its third quarter inflation report which includes a surgey of private sector economists.

For the third quarter survey, economists now see a lower 3.1 percent mean inflation forecast for 2017 compared to the previous quarter’s 3.3 percent estimate.

For 2018 it was unchanged at 3.4 percent while for 2019, the inflation forecast was reduced to 3.4 percent from 3.5 percent. The BSP said economists expect full year 2017 inflation to remain “close to the midpoint of the government’s target range of two percent to four percent amid relatively balanced risks to inflation.”

The upside pressures to inflation they continue to identify as the volatile global oil prices, weaker peso, initial implementation of the comprehensive tax reform program, government spending on infrastructure, rise in utility rates, robust consumer spending during the holiday season, and base effect. On the other hand, a key downside risk to inflation was seen to emanate from global economic recovery.