Apprehension over the projected path of commodities prices showed clearly in the decision of the Bangko Sentral ng Pilipinas (BSP) on Thursday, when the Monetary Board (MB) kept the key policy rate unchanged at 3 percent but scaled up the forecast inflation this year and next.
The freezing of the policy rate was widely expected, even as the seven-man MB recognized that this year’s forecast inflation has to be recast to 3.2 percent instead of 3.1 percent, as bared earlier, and to 3.2 percent next instead of the original forecast rate of just 3 percent. Price pressures in 2019 were to moderate to only 3.1 percent under the forecast scenario.
The corresponding interest rates on the overnight lending and deposit facilities were also frozen where they are at present, and the banks’ deposit reserves similarly steadied. The rate-setting meeting of the MB on Thursday was the Central Bank’s fifth policy meeting this year and the first under Nestor A. Espenilla Jr. as BSP governor and MB chairman.
Espenilla said while inflation was seen trending up, the seven-man MB is convinced that inflation, or the rate of change in prices, should remain manageable and end the year within target.
“The future inflation path continues to be within the target for 2017 to 2019. Inflation expectations also were to remain firmly anchored close to the midpoint of the government’s 2 percent-to-4 percent target over the policy horizon,” Espenilla said in a statement.
“The Monetary Board also recognizes that the balance of risks to the inflation outlook continues to be on the upside. While the proposed tax-reform program may exert potential transitory pressures on prices, various social safety nets and the resulting improvement in productivity will likely temper the impact on inflation over the medium term,” he added.
Other influencing events the MB considered were the global economic outlook, as well as the robust expansion of credit activities in the country.
“While output prospects for the global economy have improved, downside risks to external demand remain, due in part to geopolitical tensions and lingering uncertainty over macroeconomic policies in advanced economies,” Espenilla said.
“Moreover, as credit activity expands in line with output growth, the economy’s improving absorptive capacity is, likewise, seen to be sustained, thus, mitigating inflation pressures over the long run,” he added.
Espenilla also said the optimistic view is validated by buoyant consumer data, business sentiment and, certainly, by ample liquidity in the system.
The Philippine Statistics Authority (PSA) is scheduled to release the second-quarter output data within the month.
“With these considerations, the Monetary Board believes that prevailing monetary policy settings continue to be appropriate. Looking ahead, the BSP will remain vigilant against any risks to the inflation outlook and will adjust its policy settings as needed to ensure that future inflation stays aligned with the medium-term target while being supportive of sustainable economic growth,” Espenilla said.
Earlier this week, the International Monetary Fund (IMF), likewise, said: “When we look at the world, we do see interest rates are going to increase, and this is most likely going to have an impact on the Philippines. We would expect higher interest rates in the Philippines down the road in line with global tightening of financial conditions, but we don’t see the need to tighten monetary policy stance today,” IMF Mission Head Luis Breuer said at the conclusion of its so-called Article IV consultations with the Philippines.