BSP keeps policy on hold, maintains inflation outlook for 2016, 2017 within average target range

Bangko Sentral ng Pilipinas (BSP) kept its policy on hold today, in line with market expectations. The Philippines’ central bank maintained the policy overnight reverse repo rate at 4% and the Special Deposit Account (SDA) at 2.5%. Moreover, the BSP kept its inflation outlook for 2016 and 2017 unchanged at 2.1% and 3.1% respectively, within the central bank’s average inflation target range of 2%-4%.

According to the central bank’s press release, inflation continues “to be driven mainly by supply-side factors. Meanwhile, inflation expectations for 2016 have declined slightly due to low inflation readings in recent months but remain firmly within the inflation target band over the policy horizon. The Monetary Board also recognized that while global economic conditions have become weaker since the previous meeting, prospects for domestic economic activity nevertheless remain robust, supported by solid private household consumption and investment, buoyant business sentiment, and adequate credit and domestic liquidity. Higher fiscal spending is expected to further boost domestic demand.”

Meanwhile the central bank also mentioned that the overall balance of risks around the inflation forecast continues to be skewed to the downside with “potential downward price pressures associated with slower-than-expected global economic activity and possible second-round effects from lower international oil prices”. However, the effects from El Niño dry weather conditions on food prices and utility rates and pending petitions for power rate adjustments pose upside risks to the inflation forecast.

The BSP is likely to keep the policy unchanged as it deals with the framework transition to an interest rate corridor, said ANZ in a research note. If the transition is seamless, the central bank is likely to start tightening again during the end of fourth quarter 2016 with a hike of 25bps, added ANZ.