Thursday, November 12, 2015

Philippines holds rates, sees balanced inflation risks

   The central bank of the Philippines left its key policy rates steady, as expected, saying it considers the risks to inflation to be "broadly balanced," with potential upside pressures from higher food and utility prices while downside risks stem from slower global economic growth.
    Bangko Sentral ng Pilipinas (BSP), which raised its key rate by 50 basis points in 2014, repeated that it expects inflation in 2015 to settle "below" its target range of 3.0 percent, plus/minus 1 percentage point, a slight change to its August statement when it expected inflation to settle "slightly below."
    But despite the recent low readings for inflation, the BSP confirmed that it expects inflation to return to its target range in 2016 and 2017 given the adverse weather from El Nino and pending requests for higher utility rates.
    Inflation in the Philippines was steady at 0.4 percent in October and September, and in September the International Monetary Fund said it expected inflation to be in the bottom half of the BSP's target band this year, averaging 2.1 percent. In 2016 it saw inflation averaging 3.5 percent.
    Earlier this week BSP Governor Armando Tetangco also said he expects inflation to move closer to the bank's target in the next two years and the central bank was still examining whether the introduction of an interest rate corridor system will require policy changes.
    In September the BSP approved a plan to start using an interest rate corridor system from the second quarter of next year.
    The current policy rate, the overnight borrowing or reverse repurchase rate of 4.0 percent, will remain the center rate and be guided through term auctions. The overnight lending or repurchase rate, currently at 6.0 percent, will become a ceiling and the special deposit account (SDA) rate of 2.5 percent will serve as the floor of the corridor.

 Bangko Sentral ng Pilipinas issued the following statement:

"At its meeting today, the Monetary Board decided to maintain the BSP's key policy rates at 4.00 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.00 percent for the overnight lending or repurchase (RP) facility.  The interest rates on term RRPs, RPs and special deposit accounts (SDA) were also kept steady. The reserve requirement ratios were likewise left unchanged.

The Monetary Board’s decision is based on its assessment of inflation dynamics and the risks to the inflation outlook over the policy horizon. Latest baseline forecasts continue to indicate that inflation could settle below the target range of 3.0 percent ± 1 percentage point for 2015. However, notwithstanding the recent low inflation readings, inflation is projected to return steadily to a path consistent with the inflation target for 2016-2017, given the foreseen adverse weather conditions and the pending petitions for utility rate increases. Meanwhile, inflation expectations remain anchored within the inflation target band.  

The Monetary Board also considered the risks to the inflation outlook to be broadly balanced. On the one hand, potential upside pressures could come from the impact of protracted El Niño dry weather conditions on food prices and utility rates. On the other hand, downside risks could arise from possible slower-than-expected global economic activity.

The Monetary Board also observed that domestic demand conditions have stayed firm, as business and consumer sentiment continue to be buoyant and domestic liquidity remains adequate. In addition, the Monetary Board noted that the challenging external environment and uneven growth prospects in advanced and key emerging economies supported a steady policy setting.

Given these considerations, the Monetary Board believes that the benign inflation environment and the economy’s underlying growth momentum provide adequate room to maintain monetary policy settings. The BSP will continue to monitor emerging price and output conditions to ensure price and financial stability conducive to sustainable economic growth."


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