BSP keeps rates on hold; sees higher 2018 inflation

The Bangko Sentral ng Pilipinas (BSP) kept its key overnight rates steady but raised its 2018 inflation forecast to 3.4 percent from a previous estimate of 3.2 percent.

The BSP did not change its 2017 and 2019 inflation forecasts of 3.2 percent. It continues to expect a manageable inflation environment but decided to adjust next year’s inflation forecast because of the peso depreciation, higher oil prices, and what could be an acceleration in liquidity growth.

BSP Governor Nestor A. Espenilla Jr. yesterday said they are closely monitoring both liquidity and credit growth and their impact on inflation and the financial sector. “While credit continues to expand in line with output growth, the Monetary Board remains watchful over evolving liquidity and credit conditions and their implications on price and financial stability,” he said.

The BSP's overnight reverse repurchase (RRP) facility is still at three percent, and the rates on the overnight lending and deposit facilities are the same.

According to Espenilla, they continue to expect a within-target inflation outlook in the next three years, or between two percent and four percent. “While inflation has trended higher due mainly to higher utility rates and fuel prices, latest forecasts continue to show the future inflation path staying within (the target)… close to the midpoint of the inflation target range over the policy horizon.”

The central bank also continues to assess that there is more bias to upside risks because of a projected increasing crude oil prices. In the meantime, the proposed tax reform program “may exert potential transitory pressures on prices, although various social safety nets and the resulting improvement in output and productivity are also expected to temper the impact on inflation over the medium term. On the other hand, the proposed reform in the rice industry involving the replacement of quantitative restrictions with tariffs and the deregulation of rice imports could temper inflation.”

The inflation rate climbed higher in October at 3.5 percent from 3.4 percent in September, it is the highest monthly rate for the year. The October inflation is also the highest level since November 2014.

The BSP noted that core inflation — the rate minus certain volatile food and energy items — eased to 3.2 percent in October from 3.3 percent in the previous month.