Thursday, June 23, 2016

Philippines holds new rate, inflation risks now balanced

    The central bank of the Philippines left its new policy rate, the rate on its overnight reverse repurchase facility (RRP), unchanged at 3.0 percent, along with the other new rates that form the upper and lower bound of its interest rate corridor (IRC) that took effect on June 3.
    Bangko Sentral ng Pilipinas (BSP) said today's decision by its monetary board was based on the view that inflation continues to be manageable - a phrase often used by the BSP - with the latest forecast showing that inflation is likely to settle near the lower end of its target range this year and rise to the midpoint in 2017 and 2018.
    This forecast compares with its statement in May that inflation should settle within its target range this year and 2017. Last month it acknowledged that expectations had declined slightly.
     The BSP, which targets inflation of 3.0 percent, plus/minus 1 percentage point, said the overall balance of risks surrounding its inflation outlook was now deemed to be "broadly balanced," an improvement from last month when the risks were tilted to the downside.
    In addition to the recent recovery of oil prices, the BSP said improved rainfall should ease the upside risks to food and utility prices in coming months, although pending petitions for higher electricity rates remain an upside risk.
    Headline inflation in the Philippines rose to 1.6 percent in May from 1.1 percent in the two preceding months.
    But while the new information supports keeping rates steady, the BSP also said the continued uncertainty surrounding monetary policy in major advanced countries "requires a steady hand on policy settings in order to retain flexibility in the period ahead."
    The central bank introduced its new rate structure to improve the transmission of its policy to money markets and financial markets.
    The IRC comprises an overnight lending facility (OLF) that forms the upper bound of the rate corridor. This rate is 3.50 percent. The lower bound is comprised of the overnight deposit facility (ODF), which is set at 2.5 percent.
    The RRP is the central bank's benchmark rate and was cut to the current level of 3.0 percent from a previous 4.0 percent as part of the change. RRP is set in the middle of the rate corridor.

    Bangko Sentral ng Pilipinas issued the following statement:

"At its meeting today, the Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept steady. The reserve requirement ratios were likewise left unchanged. 

The Monetary Board’s decision is based on its assessment that the inflation environment continues to be manageable. Latest forecasts indicate that average inflation is likely to settle near the lower edge of the 3.0 percent ± 1.0 percentage point target range in 2016 and rise toward the mid-point of the target range in 2017 and 2018. The overall balance of risks surrounding the inflation outlook is now deemed to be broadly balanced. With global oil prices recovering, the risk of second-round effects from lower oil prices is likely to recede in the period ahead. Nevertheless, slower global economic activity remains a key downside risk to the inflation outlook. Given improved rainfall conditions and the shift to neutral weather conditions in the May-July period, the upside risks to food and utility prices due to El Niño are also seen to recede in the coming months. However, pending petitions for adjustments in electricity rates remain an upside risk to inflation. Meanwhile, inflation expectations remain broadly consistent with the inflation target over the policy horizon.

At the same time, the Monetary Board also observed that prospects for global economic growth have remained subdued since the previous meeting, with increased downside risks to global activity. On the other hand, domestic economic activity continues to be firm, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity. Higher fiscal spending is also expected to further boost domestic demand.

On balance, therefore, the sum of recent new information, particularly on the emerging outlook for inflation and demand conditions, continues to support keeping monetary policy unchanged. At the same time, the continued uncertainty relating to monetary policy prospects in major advanced economies requires a steady hand on policy settings in order to retain flexibility in the period ahead."


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