The Monetary Board, the policy-setting body of Bangko Sentral ng Pilipinas, is expected to maintain the current policy stance when it meets this month due to a prevailing low inflation environment, an economist of the Dutch bank ING said Tuesday.
“The low February inflation rate widens further BSP’s leeway to respond to challenges as economic activity is relatively favorable,” ING Bank Manila senior economist Joey Cuyegkeng said in a report.
He said El Niño or the dry spell’s impact on agriculture, had been reported to be more modest than expected and key agriculture sites were partially spared from the intense dry spell.
He said typhoons in the second half of 2015 raised water levels in major dams and allowed irrigation in agricultural areas in northern Philippines, a reason for food inflation remaining low or moderating.
“We continue to believe that BSP will keep policy setting steady in the first half although the implementation of IRC [interest rate corridor] could be an opportunity,” he said.
The Monetary Board will conduct its second meeting for the year on March 23, 2016.
Cuyegkeng said the lower-than-expected February inflation expanded Bangko Sentral’s leeway to further support economic activity. February inflation further decelerated to 0.9 percent from 1.3 percent in January. It was also significantly lower than 2.5 percent a year ago.
The figure brought the inflation average in the first two months of 2016 to 1.1 percent, well below the government’s official target range of 2 percent to 4 percent this year.
Cuyegkeng, however, noted upside risks to inflation and possibly renewed market volatility if the FOMC of the US signals a tighter stance.
“There is no compelling reason to ease or tighten at this time even with expectations of gradually rising inflation over the policy horizon,” he said.
He said transport fares were expected to ease further this month. He said lower transport fares might prevail for most of the year but the condition would depend on a collective decision of oil producers.
He also said El Niño-related price pressure in southern Philippines might also dissuade policy easing for now.
“In addition, the focus is the implementation of the IRC. We expect some indication from BSP after the March 23 policy rate meeting. We are keeping our one-rate hike view for this year as inflation expectations may shift higher with gradually rising inflation and with possible increase in oil prices later this year,” Cuyegkeng said.
Bangko Sentral on Feb. 11 kept the benchmark interest rates steady for the eleventh time since October 2014 due to a more manageable inflation environment.
The interest rates of 4 percent for overnight borrowing and 6 percent for overnight lending were maintained. The rates on special deposit accounts and reserve requirements were likewise left unchanged.
The board also cut the average inflation forecast this year to 2.2 percent from the 2.4-percent estimate made in December 2015. The forecast for 2017, however, was kept at 3.2 percent.