BSP affirms rates, ups 2018 inflation view

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By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) kept interest rates steady yesterday with inflation in check and economic activity still upbeat, despite risks from higher oil prices, geopolitical tensions, and rising global yields.

As widely expected, the Monetary Board maintained its policy stance for the 25th straight meeting.

Policy rates were kept at 3.5% for the overnight lending, 3.0% for overnight reverse repurchase rate, and 2.5% for overnight deposit during monetary authorities’ seventh review this year.

“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 government’s three percent ±1 percentage point range for 2018-2019,” BSP Governor Nestor A. Espenilla, Jr. said in a press briefing.


“The balance of risks to the inflation outlook continues to lean toward the upside due to possible higher crude oil prices.”

Inflation averaged 3.2% in January-October, pulled up by last month’s 3.5% pace that was the fastest in nearly three years.

The 10-month pace settled within the 2-4% target range set by the central bank and matches the BSP’s forecast for the entire 2017.

The BSP’s review came after the United States Federal Reserve kept borrowing rates steady last week, with policy makers there signalling they were on track to a fresh rate hike by December. US President Donald J. Trump has also named Fed Governor Jerome H. Powell as next Fed chief, which markets saw as a “dovish” candidate who would likely keep steady the current pace of rate hikes.

The Fed kept benchmark yields steady at its Oct. 31-Nov. 1 review, saying the US economy and job markets remain headed for recovery which, in turn, strengthens the case for a fresh “lift-off.”

“[W]e have different economic and business cycles. An adjustment in monetary policy by the US Fed does not necessarily warrant a response from the BSP,” Deputy Governor Diwa C. Guinigundo said, noting that domestic inflation as well as credit and liquidity dynamics remain the key focus in crafting policy actions.

However, Mr. Guinigundo said major global developments like the Fed’s next moves and geopolitical concerns are always factored in the central bank’s regular assessment.

The BSP has kept its policy stance unchanged since September 2014, except for procedural cuts introduced in June last year for the shift to an interest rate corridor scheme.

The Monetary Board also kept reserve requirement ratios (RRR) imposed on banks unchanged, although officials said the planned cuts are always being considered.

Mr. Espenilla said reducing the 20% RRR imposed on big banks is meant to be done in a “series,” with the regulator still “finding the right timing” to execute these changes. The BSP chief has said that he wants to see the reserve standard reduced to single-digit levels, but noted that this would have to be carefully timed to take money supply and credit conditions in consideration so as not to disrupt financial market activity.

Economists asked in a BusinessWorld poll late last week said they expect an RRR cut by next year at the earliest.

Inflation is broadly seen to clock within the BSP’s 2-4% target band for three years to 2019, although the central bank raised its estimate for next year amid rising world crude prices.

Mr. Guinigundo said annual forecasts for 2017 and 2019 have been maintained at 3.2%, while next year’s estimate was raised to 3.4% from 3.2% previously.

Expectations of higher petroleum prices, increasing money supply and a weaker peso prompted this adjustment, alongside the faster-than-expected pickup in commodity prices in September and October.

The peso has been trading at the P51 level against the greenback as of yesterday, beyond the P48-50 assumption given by the central bank earlier this year.

The BSP will again review its policy stance on Dec. 14, its eighth and final review for the year.