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[Correction: The first paragraph has been edited to include additional information]
The Philippines’ central bank has kept its interest rate on the overnight reverse repurchase (RRP) facility at 3 percent. Last month, the BSP cut the rate and narrowed the band around it. The central bank had mentioned last month that starting 3 June, it would make a transition to an interest rate corridor system in order to make monetary policy more effective.
It kept the corresponding interest rates on the overnight lending and deposit facilities unchanged too. The reserve requirement ratios were also kept on hold today. The decision of the central bank is based on its assessment that the inflation scenario continues to be manageable.
The BSP has revised its 2016 inflation outlook. In its statement, the central bank has mentioned that the average inflation is expected to be close to the lower edge of the 3 percent, plus or minus 1 percentage point, target range this year and accelerate towards the mid-point of the target range in 2017 and 2018. The balance of risks around the inflation outlook is believed to be widely balanced. The central bank kept its projection for 2017inflation unchanged at 3.1 percent, whereas inflation is likely to ease to 2.6 percent in 2018.
The BSP stated that the risk of second-round impacts from lower oil prices is expected to diminish in the future with global oil prices rebounding. However, weaker global economic activity continues to be a major risk on the downside to the inflation forecast. Meanwhile, the upside risks to utility prices and food due to El Niño are expected to ease in the months to come, given the improved conditions for rainfall and change to neutral weather conditions in the May to July period.
The Monetary Board has also observed that the global economic growth outlook has continued to be weak since its previous meeting with increase risks on the downside to global activity. Meanwhile, the economic activity in home continues to be strong, underpinned by strong private household consumption and investment, adequate credit and domestic liquidity, and buoyant business and consumer sentiment. The central bank also projects higher fiscal spending to further stimulate domestic demand.
The central bank’s policy statement mentioned that 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”.
“We expect BSP to remain on hold through 2016 and we are pencilling in policy tightening to the first half of 2017. Average inflation will likely remain within the 2-4% target over the next 12 months and the risk of delays in fed rate normalisation is rising”, said ANZ in a research report.
