Philippine central bank keeps policy stance on hold, likely to hike rates in Q1 2018

The Philippine central bank, BSP, kept its policy stance unchanged today, as widely expected. The BSP maintained its interest rate corridor at 2.5 percent, 3 percent and 3.5 percent. The BSP’s accommodative stance has kept the lower bound of the corridor at 2.5 percent since September 2014.

Inflation projections based on a survey of the private sector remained at 3.2 percent for this year; however, forecast for 2018 was raised to 3.4 percent from 3.2 percent. Meanwhile the 2019 projection was maintained at 3.2 percent. Inflation expectations, at this point, are not expected to rise significantly without proper clarity on the tax reform package.

The BSP sees the inflation outlook as manageable even as it continues to acknowledge that risks are skewed to the upside. Inflation rate in October had accelerated to 3.5 percent year-on-year, staying in the upper half of the central bank’s target range of 2 percent to 4 percent. The pending transport adjustments are expected to worsen the risks coming from solid demand-pull pressures, stated ANZ in a research report.

The Philippine central bank also anticipates liquidity to increase by 13 to 14 percent in 2017-2019, while maintaining its medium-term goal of lowering the reserve requirement ratio. The RRR is currently at 20 percent, the highest in the region. According to ANZ, the upside risks to inflation are increasing.

“Combined with the intensifying imbalances of high credit growth, excessive investment in the real estate sector and the deterioration of the current account, we reiterate our view that monetary policy tightening is necessary. We expect 50bps (cumulative) of rate hikes in Q1 2018”, added ANZ.

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