The Bangko Sentral ng Pilipinas (BSP) on Thursday opted to calm the markets when it decided to maintain key policy rates due to lower inflation during the last policy meeting of Central Bank Governor Amando M. Tetangco Jr.
Following its monetary-policy meeting on Thursday, Tetangco announced the Monetary Board’s decision to maintain the interest rate on the overnight reverse repurchase (RRP) facility at 3 percent.
The corresponding interest rates on the overnight lending and deposit facilities were also kept steady. The reserve requirement ratios were also kept unchanged.
Tetangco said the decision came as the country’s inflation environment continued to be manageable, with latest baseline forecast revisions pointing to a lower path of future inflation.
In particular, Central Bank Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo said the inflation forecast for 2017 was cut to 3.1 percent, from the earlier projection of 3.4 percent.
For next year, the BSP maintained its 3-percent inflation forecast, while the projected inflation for 2019 inflation forecast was pegged at 3 percent.
While the BSP admitted that risks to the inflation outlook remains tilted to the upside, the growth of consumer prices is still seen to hit target from this year up until 2019.
“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,” Tetangco said.
Guinigundo also told reporters the projected impact of tax reform on inflation is lower than 1 percentage point for 2018 and 2019, so even if it is added on inflation, the growth of consumer prices will still be within target for both 2018 and 2019.
“The long-run effects on productivity will improve overall supply and further dampen inflation,” Tetangco said.
The weaker peso, as seen in recent days due to the market’s sentiment of another potential rate hike this year from the Federal Reserve (the Fed) favoring the US dollar, is not expected to derail the inflation path for the year.
Guinigundo said that, while the peso has shown recent weakness, the exchange rate passthrough—or its ability to affect local inflation—has diminished over the years.
“The peso actually depreciated starting on Wednesday, hitting 50 to a dollar on account of pronouncements of some Fed officials that even if inflation is still off-target, the fact that labor market conditions are becoming tighter, that would in effect be transmitted in terms of higher inflation,” he said.
“Because of that, market thought that is a definitive clue that they will continue tightening monetary policy in the US, which means one more time before end of year, and two to three times in 2018. That’s one of the major reasons the dollar became strong relative to the peso,” Guinigundo added.
Data from the PDS Group showed the peso sank further to the 50 to a dollar territory on Thursday, hitting P50.345 to a dollar. The previous day’s trading value was at P50.29 to a dollar.
The traded volume was also higher during the day at $802.4 million, from the previous day’s $727.25 million.
Other considerations for the decision to maintain monetary-policy settings were ample liquidity conditions and the still uncertain global economic outlook.
Thursday’s meeting is the Central Bank’s fourth monetary-policy meeting for the year. It is also the last meeting of the Monetary Board with Tetangco as its chairman as he is scheduled to step down in July this year. The BSP will be having its next monetary-policy meeting on August 4, under the leadership of incoming BSP Governor Nestor M. Espenilla Jr.