Thursday, August 11, 2016

Philippines holds rate, trims 2016 inflation outlook

    The central bank of the Philippines left its benchmark overnight reverse repurchase facility rate (RRP) steady at 3.0 percent but trimmed its outlook for average inflation this year to "slightly below" its target range from June's statement of "near the lower edge" of its range.
     Bangko Sentral ng Pilipinas (BSP) also appeared to be more uncertain about the its future monetary policy stance, saying "increased uncertainty over prospects for growth and monetary policy action in major advanced economies requires prudence in policy settings."
     This statement compares with its previous policy statement from June 23 when it said "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."
    In June the BSP adopted an Interest Rate Corridor to improve the transmission of its policy decisions to financial markets and as part of that shift the RRP was lowered to 3.0 percent from 4.0 percent. The BSP said the shift to a rate corridor and the cut in the RRP did not signify a change in its monetary policy stance and was mainly operational in nature.
     In today's statement, the BSP repeated its description of the inflation environment as "manageable," with the balance of risks broadly balanced. Upside risks to inflation emanate from adjustments to electricity rates while slower global economic activity remains the key downside risk.
    Headline inflation was steady at 1.9 percent in July from June, below the central bank's target range of 3.0 percent, plus/minus 1 percentage point.
    Amidst subdued prospects for global economic growth, the central bank said domestic economic conditions continue to be firm, boosted by solid household consumption and investment, buoyant business and consumer sentiment and adequate credit, with higher fiscal spending to boost demand further.
    Gross Domestic Product in the Philippines grew by an annual rate of 6.9 percent in the first quarter of this year, up from 6.5 percent in the previous quarter.
    Last month the International Monetary Fund backed a 10-point reform plan by the Philippine government of President Duterte, but said the reforms should go further and include comprehensive tax reform that would raise additional revenue to finance higher productive spending.
    The IMF said the government should boost its budget deficit to 3 percent of GDP over the medium term from 1.4 percent in 2015 and a target of 2.0 percent, moves that would boost the country's baseline, medium-term growth outlook to 7-8 percent from 6-7 percent.
    "This additional effort scenario would make the Philippines one of the fastest growing (if not the fastest) economies in the world and help reduce poverty towards the government's ambitious target," the IMF said.


    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 remains manageable. Latest forecasts continue to indicate that average inflation is likely to settle slightly below 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 also seen to be broadly balanced, with upside risks emanating from pending petitions for adjustments in electricity rates. Slower global economic activity also remains the key downside risk to the inflation outlook. Meanwhile, inflation expectations continue to be broadly in line with the inflation target over the policy horizon.

At the same time, the Monetary Board noted that prospects for global economic growth have remained subdued since the previous meeting. By contrast, 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. Higher fiscal spending is also expected to further boost domestic demand. 

Given these considerations, the Monetary Board believes that current monetary policy settings remain appropriate. At the same time, increased uncertainty over prospects for growth and monetary policy action in major advanced economies requires prudence in policy settings. Going forward, the BSP will continue to monitor emerging price and output conditions to ensure price and financial stability conducive to sustained economic growth."


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