No need to tweak BSP rates – Espenilla

Despite an elevated inflation path for this year, the central bank will likely keep an on-hold monetary policy stance for some time with price pressures expected to decelerate in 2019.

“Monetary policy action is not warranted at this time,” said Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. in a private sector gathering. The Monetary Board left key rates unchanged during its policy meeting on Thursday, citing manageable inflation outlook particularly since the base year for measuring inflation has been adjusted.

Espenilla noted that their continued on-hold stance was based on robust domestic demand, credit and liquidity growth, and the recovery in global growth, but he also emphasized that since they expect inflation to be on the high end of the target this year, they will be extra vigilant in their data monitoring, especially for potential second round effects.

In the event that second round price pressures do manifest, coming from adjustments in the minimum wages and transport fares, Espenilla said they will take “immediate and appropriate measures” including tweaking benchmark rates.

“Economic growth remains solid enough to absorb some policy tightening if warranted,” he assured members of the Money Market Association of the Philippines in a general assembly Thursday night. “Further, we observe that market mechanisms are working well to enable the economy to automatically adjust to fluid conditions efficiently and avoid serious imbalances, as well as overheating risks.”

On the external side, the BSP continues to closely track US interest rates and other monetary policy actions of major central monetary authorities, as well as changes in geopolitical and protectionist issues that will impact on global growth.

Espenilla reiterated that the domestic economy is strong and that he is confident of sustained six percent to seven percent growth without threats of overheating.

“The Philippines’ robust economic growth has been accompanied by manageable inflation. We have established since 2009 a solid track record of meeting our inflation targets,” he said. During Thursday’s policy meeting, the BSP forecasts inflation of 3.9 percent for this year and 3.5 percent for 2019, using 2012 as base year.

In the meantime, Espenilla said the BSP’s liquidity management continue to support price and financial stability, and market policies adopted likewise support price discovery and are self-correcting mechanisms.

The interest rate corridor or IRC is one of its effective liquidity control tool and its implementation in 2006 introduced the term deposit auction facility. The TDF has helped the BSP to guide short-term market rates closer to the benchmark rates.

“Indeed, for the past months, market rates have seen a stronger anchoring to the BSP’s policy rate (and) banks’ time deposit and short term interest rates have trended upwards, aligning with BSP’s IRC,” noted Espenilla.

On March 2, the central bank cut banks’ reserve requirement ratio or RRR, one of the first in a set that would see to its gradual reduction. “Initial evidence based on the last three TDF auctions since the first RRR cut took effect are encouraging and indicative of the potency of the IRC facilities for liquidity absorption,” said Espenilla. “We can definitely do more as the system continues to mature.”

“Ultimately, the BSP has many options to maintain firm monetary control. Shifts in monetary policy stance will continue to be signalled through changes in the policy rate. But we can also adjust monetary conditions without necessarily changing the policy rate, by adjusting auction volumes to move the marketdetermined TDF rates,” he added.