Inflation manageable for the rest of 2015

The Bangko Sentral ng Pilipinas (BSP) does not expect to “reverse” actions undertaken last year as current monetary policy settings remain appropriate given expected manageable inflation for the rest of 2015. BSP Governor Amando M. Tetangco Jr. told The STAR in an e-mail the 50-basis point rate hike and increases in the Special Deposit Account rate and reserve requirement ratios last year were done to contain any impact of heightened volatility in financial markets and ensure inflation remains within target.

“At this point, we don’t foresee reversing those actions, unless something unexpected occurs such as global growth weakening significantly more than anticipated that in turn slows domestic activity,” Tetangco said.

“There are many moving parts in the system— for instance, unexpected geopolitical risks, any unraveling of negotiations in the EU, and excessive market volatility in China that could affect the Chinese real sector—which could influence market behavior,” he noted.

However, Tetangco stressed the country has sound macroeconomic fundamentals such as a healthy external liquidity position and strong banking system that would shield it from the impact of any adverse development abroad.

“We have monetary and fiscal space to support economic activity should that be needed. At the same time, we have room in our policy tool kit to address financial stability pressures should such arise,” Tetangco said.

The central bank last year bumped up banks’ reserve requirement ratios by a total of two percentage points and increased the SDA rate by 25 basis points to mop up excess liquidity in the financial system.

The overnight borrowing and lending rates, meanwhile, were also hiked by a total of 50 basis points in order to make sure inflation would remain within target until this year.

“You will recall we already adopted a series of measures in 2014 that, in part, were designed to help prepare the market for the eventual Fed (US Federal Reserve) hike — to help temper exuberance with the ‘low for long’ frame of mind and assist participants in evaluating ‘risks’ — so that any financial market adjustments when the Fed actually does the lift off would not be too sharp,” Tetangco said.

“We believe those preemptive moves, together with the other prudential measures we adopted, have been effective in so far as containing market exuberance and keeping inflation expectations anchored,” he continued.

Monetary authorities have kept key policy rates steady so far this year as inflation expectations continued to settle within the two to four percent target. The next rate-setting meeting has been slated for Aug. 13.

Tetangco said given broadly-balanced risks to inflation this year, current policy settings “remain appropriate.”

“But we keep a close watch on the risks mentioned earlier, as well as external developments, particularly Fed actions. External developments, in particular have a way of sneaking in to create market volatility, which poses challenges for policy setting,” Tetangco said.

Inflation has averaged two percent as of June, at the low end of the BSP’s target band for the year. The central bank expects the rate to remain manageable this year, Tetangco said, with the full-year average seen settling close to the lower end of the goal.

“There could be months when the inflation outturns would be below the lower bound, but we expect monthly inflation to slowly move back to mid-range by 2016,” he added.

Downside price pressures would arise from slower global economic growth, while upside risks would likely come from the impact of El Nino on the cost of food.

“Deflationary risks appear to be minimal, given firm demand- side conditions. Credit growth continues to expand at a reasonable pace, with credit still going to the productive sectors of the economy. Interest rates remain at historic lows,” Tetangco said.

Economists from Bank of the Philippine Islands, Standard Chartered and DBS Bank all expect the BSP to leave policy rates unchanged this year given the strong domestic economy and within-target inflation rate.

“Inflation momentum is very muted heading into July and it seems unlikely to change for the rest of the year. The risks are higher food prices from weather impact and oil price rebound. However, demand and supply factors look favorable for low price pressures ahead,” Jeff Ng from Standard Chartered said.

Gundy Cahyadi of Singapore- based DBS, meanwhile, noted that upside risks going into 2016 are expected to come from the impact of the El Nino weather on food supply and prices.

At the same time, Emilio Neri Jr., lead economist at BPI, said the central bank will likely adjust reserve requirement ratios and SDA rates while maintaining key rates this year.

He said lower reserve requirements for banks may boost domestic economic growth, inflation, bank credit, liquidity, and government spending given they are all easing recently.

“Also, a lower RRR could help temper unhedged FX (foreign exchange) borrowers in both the private and public sector from aggressively taking on more FX liabilities than they currently already have,” Neri noted.

“Deflationary risks appear to be minimal, given firm demandside conditions. Credit growth continues

to expand at a reasonable pace, with

credit still going to the productive sectors

of the economy. Interest rates remain at historic lows,” Tetangco said.