The Monetary Board, the policy-making body of Bangko Sentral ng Pilipinas, on Thursday kept the benchmark interest rates unchanged, on lower inflation and expected robust economic growth.
Bangko Sentral Governor Amando Tetangco Jr., who attended his last policy meeting as board chairman prior to his retirement on July 3, said interest rates were maintained at 3.5 percent for overnight lending, 3 percent for overnight borrowing and 2.5 percent for deposit facilities. The reserve requirement ratios were also retained.
“The board’s decision is based on its assessment that the inflation environment continues to be manageable. Latest baseline forecasts indicate a lower path of future inflation, with average inflation remaining within the target of 2 percent to 4 percent for 2017-2019,” Tetangco said.
The manageable inflation prompted the board to reduce the inflation average forecast this year to 3.1 percent from 3.4 percent made on May 11. The forecast for 2018 was kept steady at 3 percent. Inflation is projected to average 3 percent in 2019/
Inflation rate averaged 3.2 percent in the first five months, slightly higher than the midpoint of the target range of 2 percent to 4 percent for 2017.
Deputy Governor Diwa Guinigundo said the board considered several factors in its decision to maintain the policy rates. “While there may be potential transitory impact of the proposed tax reform program, the social safety nets are expected to mitigate the resulting inflationary pressures. The long-run effects on productivity will improve overall supply and further dampen inflation,” Guinigundo said.
He said prospects for the global economy had improved, but risks to external demand remained tilted to the downside.
Guinigundo said the board considered the potential impact on global financial market conditions of the ongoing monetary policy adjustment in the US, noting that maintaining monetary policy settings at this time would allow Bangko Sentral to continue to assess evolving economic developments and calibrate its policy tools as appropriate.
DBS Bank of Singapore said Bangko Sentral might start tweaking its stance in August by raising 25 basis points to prevent the further weakening of the peso. It said on a nominal effective exchange rate basis, the peso has depreciated about 6.7 percent since the start of the year, making it one of the worst performers in Asia
“At the same time, the current account balance has also slipped into a deficit. It is likely to widen going forward, assuming strong investment growth is sustained. While we are not overly concerned about the current account situation, it may affect sentiment on the peso,” DBS said.
“Since April, the BSP seemed to be no longer tolerant of excessive weakening of the unit. Expect the BSP to raise its policy rate by 25 bps to 3.25 percent at its meeting on Aug. 10. If so, this will also be the first policy move under its new central bank governor,” the bank said.
DBS said Bangko Sentral was expected to deliver another 25 basis points’ hike by year-end and pause until mid-2018.