The monetary authorities on Thursday acknowledged a number of pressure points on prices remaining in place over the policy horizon, but had great confidence that their existence do not at all threaten continued price stability. Such confidence allowed the policy-making Monetary Board of the Bangko Sentral ng Pilipinas to keep the policy-rate structure unchanged since so-called operational adjustments were made in June last year.
This had the impact of keeping the rate at which the BSP borrows from banks unchanged at 3 percent. The rate at which it lends to financial institutions, the special deposit rates, as well as the banks’ deposit reserves, have similarly been kept intact.
At the seventh and final rate-setting meeting this year, the seven-member Monetary Board made it very clear that headline inflation and threats to its continued stability should remain manageable throughout the policy horizon.
Such was their confidence that forecast inflation this year was kept steady at 3.2 percent, although the forecast inflation next year was recast higher to 3.4 percent, from 3.2 percent originally.
The events the monetary authorities cited for the higher inflation forecast in 2018 include expectations of higher crude-oil prices, the anticipated rise in domestic liquidity now seen growing 13 percent to 14 percent on average, the weak peso and the higher-than-projected October and September inflation prints.
Ten-month inflation average 3.1 percent, or well within the government’s target rate this year of 2 percent to 4 percent.
According to BSP Governor Nestor A. Espenilla Jr., risks to the inflation outlook tilts to the upside due to the tax-reform program proposed by the national government, whose final form should have transitory impact on prices.
“While inflation has trended higher due mainly to higher utility rates and fuel prices, latest forecasts continue to show the future inflation path staying within the government’s [2 percent-to-4 percent] target range for 2018 to 2019,” Espenilla told financial reporters.
“Based on these considerations, the Monetary Board believes that prevailing monetary policy settings continue to be appropriate,” the governor added.
BSP Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo also spoke of “very little to no reason to change the monetary-policy stance at this point,” despite the apparent tightening bias of other central banks, particularly the US Federal Reserve (the Fed).
“We have different economic and business cycles, and adjustments in monetary policy by the US Fed does not necessarily warrant a corresponding response of monetary policy from the BSP,” Guinigundo said.
The BSP makes monetary-policy adjustments on the basis of its outlook on inflation, domestic demand conditions and credit and liquidity levels.
Espenilla said that, while geopolitical tensions and uncertainty over macroeconomic policies in advanced economies present downside risks to near-term prospects for global economic growth, the outlook for domestic economic activity remains firm as supported by positive consumer and business sentiment and ample liquidity. Credit is also seen to continue to expand in line with output growth.
“The BSP will continue to monitor price and output development for any risks to the inflation outlook and will adjust its policy settings as necessary to ensure sable prices and sustainable economic growth,” Espenilla said.
Reserve requirement adjustments
On the banks’ deposit reserves, officials acknowledged that adjustments that free up still more money in the system has “always on the table” at some undetermined point forward.
The deposit reserves still stands at 20 percent of the banks’ unimpaired capital. Espenilla said the Monetary Board is always cognizant of global market developments and domestic events when introducing financial-market reforms, particularly those that deepen the domestic debt market.