THE Monetary Board decided to keep the overnight reverse repurchase (RRP) facility unchanged at 4.75 percent on Thursday, and a local economist said it will likely maintain interest rates for the rest of the year.
As widely anticipated by markets, the Bangko Sentral ng Pilipinas (BSP) on Thursday kept all its monetary-policy levers unchanged for its first monetary-policy meeting of the year as inflation pressures start to dissipate.
Central Bank Deputy Governor Diwa Guinigundo said the Monetary Board’s decision is based on its assessment of a more manageable inflation environment for 2019, with risks to this inflation outlook remaining evenly balanced for the time being.
This means that the interest rate on the BSP’s overnight reverse repurchase facility remains at 4.75 percent. The interest rates on the overnight lending and deposit facilities were, likewise, held steady.
“Latest baseline inflation forecasts show inflation settling within the target band of 2 to 4 percentage points for 2019 to 2020, as price pressures continue to recede due to the decline in international crude-oil prices and the normalization of supply conditions for key food items,” Guinigundo said.
“At the same time, domestic demand conditions have remained firm, supported by a projected recovery in household spending and the sustained implementation of the government’s infrastructure program,” he added.
As such, the BSP’s forecast for inflation was also scaled back for 2019. Inflation is now expected to hit 3.1 percent on average for this year, down from the 3.2-percent forecast announced by the BSP in their December meeting.
For 2020, the inflation forecast is broadly unchanged at 3 percent.
3 factors
The reduction in the forecast for this year was hinged on three things: lower oil prices in the global market, base effects and the expectation of lower global non-oil prices.
The BSP also kept its view that the monthly inflation print may go back to within target—or below 4 percent—by the end of the first quarter of the year.
The Philippine Statistics Authority (PSA) recently announced that inflation began the year with a 4.4-percent print in January. While this still exceeds the government target range, it is a sharp reduction from the 5.1-percent inflation rate seen in December 2018.
Guinigundo said as inflation conditions turn favorable, the Monetary Board decided that current monetary-policy settings are already appropriate, also as previous monetary responses continue to work their way through the economy.
The BSP in 2018 let out a series of monetary policy hikes to the tune of 175 basis points in total to bring inflation back to more normalized levels.
“The Monetary Board also emphasized that the BSP remains vigilant against developments that could affect the outlook for inflation and is prepared to take appropriate policy action as necessary to safeguard its price and financial stability objectives,” Guinigundo said.
ING Bank Manila economist Nicholas Mapa said they see the Central Bank easing off the “brake pedal” as the inflation threat appears safely in their rear view mirror.
“With growth expected to teeter close to the edge of 6 percent given the recent budget delay and with the inflation objective safeguarded, perhaps BSP may finally opt to give the economy an added boost to regain flagging growth momentum,” Mapa said.
T-bill rates
Ateneo Center for Economic Research and Development Director Alvin P. Ang, who predicted on Thursday that the Monetary Board would likely keep rates for the rest of the year, said the MB may veer away from cutting or increasing interest rates because those for the 91-day Treasury Bills (T-Bills) are already high at over 5 percent.
Ang said the excess liquidity observed last year and the year before went to T-bills because of the high interest rate. He added that the main challenge for the government right now is not on monetary-policy but fiscal policy.
“Hindi sila mag-ka-cut ng interest rates. Ang tingin ko for the rest of the year hindi. Plus hindi nila masyado gagalawin interest rates kasi ang taas masyado ng interest rate ng T-bills. Kung masyadong malaki ang differential walang magpapautang sa BSP [Bangko Sentral ng Pilipinas], walang mag-pa-park ng pera nila dun. Pupunta lahat sa T-bills [They will not cut interest rates. My view is that for the rest of the year, interest rates will not increase. Plus, they will not manipulate interest rates because the interest rate for T-bills is high. If the differential is significant, all the money will go to T-bills],” Ang explained in a phone interview.
Ang said the bigger concern at this time is on the fiscal side. He said the government’s “Build, Build, Build” (BBB) program is a major factor in creating pressure to obtain more loans.
Fiscal challenge
He said the BBB may only be around 2 or even 5 percent of the budget annually but in monetary terms, this is huge. The total fund needed to finance all the Duterte infrastructure projects would be around P7 trillion to P8 trillion in the medium term, which is roughly the size of the Philippine economy in a year.
Under the preliminary estimates of the three-year rolling infrastructure plan (TRIP), the national government will spend P4.71 trillion.
“I’m not worried about the Central Bank. I’m worried about the fiscal side. That is more challenging because that is causing the tight liquidity,” Ang said. “That will push the BSP to cut its reserve requirements.”
National Economic and Development Authority (Neda) documents obtained by the BusinessMirror showed that the amount covers around 7,401 projects.
This includes P3.42 trillion for 4,376 projects under Tier 1 or ongoing projects and P1.287 trillion or 4,376 projects in Tier 2 or new and/or expanded projects
In order to maximize government resources, the pipeline list of Trip projects will include Tier 1 and Tier 2 projects. Tier 1 will be composed of ongoing projects that need to have continuous funding in the next three years while Tier 2 includes “new” projects.
With Cai U. Ordinario