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Poll: Monetary policy stable as year ends

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Central bank officials like Governor Nestor A. Espenilla, Jr. have maintained that domestic economic conditions are their biggest policy consideration for now. -- Photo by Jino Nicolas/BW

By Melissa Luz T. Lopez
Senior Reporter

THE CENTRAL BANK will likely maintain policy settings when it meets on Thursday as inflation and liquidity remain manageable, notwithstanding mounting pressure from a US rate hike — the third this year — that is widely expected the day before, according to a BusinessWorld poll late last week.

Twelve economists asked on their expectations said the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) will keep policy stance unchanged on Thursday — its eighth and final policy review for 2017 — which immediately follows the rate-setting meeting of the US Federal Reserve’s Federal Open Market Committee.

BSP rates currently stand at 3.5% for the overnight lending rate, 3.0% for the overnight reverse repurchase rate and 2.5% for the overnight deposit rate.

‘NO COMPELLING REASON FOR A MOVE’
Analysts said current policy settings remain appropriate for local conditions, with the growth momentum seen intact and with inflation in November easing from a three-year peak.

“No compelling reason for a move either way at this time,” said Jose Mario I. Cuyegkeng, senior economist at ING Bank N.V. Manila.

“Activity indicators continue to point to strong growth prospects in 4Q and in 2018. Inflation has moderated but the outlook faces some upside risks in 2018.”

Commodity prices picked up by 3.3% in November, slowing from the 3.5% logged a month ago. This kept the year-to-date average at 3.2%, matching the BSP’s forecast for the entire year and staying within the 2-4% target range for 2017.

On the other hand, economic growth remains brisk following a faster-than-expected 6.9% gross domestic product (GDP) expansion in the third quarter that was fueled partly by a surge in government spending. This brought the nine-month pace to 6.7%, against a 6.5-7.5% growth goal.

For Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, hitting the targets for inflation and economic expansion warrants maintenance of the policy status quo.

Capital Economics is even betting that the BSP will keep any policy move on hold throughout 2018, with monthly inflation expected to slow down.

The think tank also dismissed overheating fears for the Philippine economy.

“Credit growth, while fast, is concentrated in productive investment, which should actually improve the capacity of the economy over the medium term.”

Analysts expect the BSP to hold fire on any policy tweaks as the Fed is expected to introduce another rate hike during its Dec. 12-13 review, which would be the third 25-basis-point increase this year as part of its rate normalization plan.

“While economic conditions overall do not warrant policy tweaks yet, pressure is building from abroad on account of the US Federal Reserve’s tightening plans, which could result in added volatility in the market,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines.

He noted that the BSP could sit out until early 2018 before increasing rates.

The BSP has held policy steady since September 2014, save for procedural changes in June 2016 to pave the way for an interest rate corridor system designed to better siphon unwanted liquidity and influence market rates.

BSP Governor Nestor A. Espenilla, Jr. has said that policy makers do not have to move in lock-step with the Fed’s tightening, pointing to domestic conditions as the biggest consideration for the Philippines’ central bank.

Victor A. Abola, economics professor at the University of Asia & the Pacific, said the BSP may consider raising interest rates and cutting the reserve requirement ratio (RRR) between January and March – a move that will “offset the tightening” of monetary conditions.

Several observers have noted that the central bank may be looking to trim the 20% reserve requirement imposed on banks — which is among the highest in the world — before it considers raising borrowing rates.

Central bank officials have said that they are constantly monitoring money supply conditions to see whether the time is ripe for an RRR reduction.

“Even as the demand for the term deposit auctions declines, excess liquidity remains substantial. At 20.4% of GDP, excess liquidity continues to fuel credit creation despite the rise in average money market rates,” ANZ Research economist Eugenia Fabon Victorino said as she discounted the chances of an RRR cut this week.

Ildemarc C. Bautista, vice-president and head of research at Metropolitan Bank & Trust Co., said there is “no pressing need” to reduce the reserve level just yet, as additional money supply in the system could be inflationary.

Domestic liquidity expanded by 14.8% in October to hit P10.3 trillion, picking up from the 14.5% pace recorded the previous month, according to BSP data.

At the same time, credit growth clocked 19.9%, slowing from September’s 21.1%.

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