BSP keeps policy rates steady

Subdued inflation that will likely fall below target this year prompted the Bangko Sentral ng Pilipinas (BSP) to keep policy rates steady yesterday.

The central bank’s Monetary Board maintained its main overnight reverse repurchase facility – used as benchmark by banks in pricing loans – at three percent for the 15th straight meeting.

The overnight lending and deposit rates were also kept surrounding the policy rate in a corridor at 2.5 and 3.5 percent, respectively.

“The Monetary Board’s decision is based on its assessment that the inflation environment remains manageable,” BSP Governor Amando Tetangco Jr. told reporters in a press briefing.

“Latest forecasts continue to indicate that average inflation is likely to settle slightly below the target range in 2016 and rise toward the midpoint of the target range in 2017 and 2018,” Tetangco said.

Specifically, inflation is seen to average 1.8 percent this year from two percent during the meeting last June. For 2017, outlook was cut to 2.9 percent from 3.1 percent.

It was kept at 2.6 percent for 2018. The target has been set at two to four-percent for the threeyear period.

BSP Deputy Governor Diwa Guinigundo said lower oil prices and weak global growth could dampen demand and pull down consumer prices, which rose 1.9 percent as of July.

“We expect some upside risks, including possible adjustments in utility rates and the imposition of taxes in petroleum products which were not factored into the baseline forecasts,” Tetangco said.

“Domestic conditions also continued to post robust activity,” he added.

Tetangco said higher government spending could also push inflation up. The planned wider deficit coincides with a tax reform that will lower income taxes and raise oil excise tax.

At the same time, however, Guinigundo said cutting reserve requirements is “always on the table,” but now is “not the proper time.”

Banks were mandated to keep a portion of their deposits with the central bank and the amount was likely kept steady yesterday.

Lowering them, as well as interest rates, signal the BSP is allowing more money to flow into the economy to support economic activity and boost growth.

“I don’t think it will build the credibility of the BSP that as we implement the interest rate corridor to mop up liquidity, we also cut reserve requirements,” Guinigundo said. “I think it’s counterproductive,” he added.

Econom ic growth, as measured by gross domestic product, rose 6.9 percent as of the first three months. The government will report second-quarter GDP figures next week.

“Domestic economic conditions continue to be firm, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity,” Tetangco said.