Bangko Sentral keeps interest rates on hold
Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Thu, 07 Feb 2019 17:12:38 +0000
With inflation ‘more manageable,’ 2019-2020 forecasts trimmed
MONETARY authorities on Thursday decided to keep key interest rates unchanged for the second time since December, pointing to increased expectations that inflation would return to target this year.
The Bangko Sentral ng Pilipinas’ (BSP) overnight borrowing, lending and deposit rates will remain at 4.75 percent, 5.25 percent and 4.25 percent, respectively, following the Monetary Board’s first policy meeting for 2019.
“The … decision is based on its assessment of a more manageable inflation environment,” central bank Governor Nestor Espenilla Jr. said in a statement read by Deputy Governor Diwa Guinigundo.
The BSP noted that latest baseline inflation forecasts showed inflation settling within the 2.0-4.0 percent target band for 2019-2020 “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.”
Assistant Governor Francisco Dakila Jr. also announced that the Monetary Board had cut its 2019 inflation forecast to 3.07 percent from 3.18 percent. The 2020 projection was also lowered to 2.98 percent from 3.04 percent.
“The deceleration of inflation for 2019 could be attributed mainly to the decline in Dubai crude oil prices … Also there are negative base effects expected from January to April and from June to October of this year as the impact of the supply shocks from oil, food and excise taxes dissipate,” Dakila said.
“Likewise, we expect the decline in world non-oil import prices print due to lower food prices. We also incorporated the impact of the rice tariffication bill and the normalization of supply conditions for key food items,” he added.
The Bangko Sentral noted that the “risks to the inflation outlook are seen to remain evenly balanced for 2019 while leaning toward the downside for 2020 given a more uncertain global economic environment, which in turn could temper potential upward pressures from commodity prices in the coming months.”
Domestic demand conditions have also remained firm, it said, supported by a projected recovery in household spending and the sustained implementation of the government’s infrastructure program.
“Given these considerations, the Monetary Board deems the prevailing monetary policy settings to be appropriate as previous monetary responses continue to work their way through the economy,” the central bank said.
“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,” it added.
Analysts said the latest Monetary Board decision supported views that interest rate cuts were in the cards.
“BSP’s inflation forecasts validate that the BSP is likely done with its tightening cycle, with a policy reversal in sights given slowing growth momentum and inflation in-check,” ING Bank Manila senior economist Nicholas Antonio Mapa said.
He sees the “central bank easing off the brake pedal ever so slightly by cutting rates in May after reducing RRR (reserve requirement ratio) in [the] first quarter.”
One percentage-point cuts to the reserve ratio, currently at 18 percent, were ordered by the Monetary Board in February and May last year.
Capital Economic’s Alex Holmes also said that interest rate cuts were now looking increasingly likely amid a sharp drop in inflation — January’s 4.4 percent, down from 5.1 in December, marked a 10-month low.
“We are expecting the first cut at the BSP’s May meeting,” he said.
Holmes added that another reason to expect the central bank to cut interest rates was a worsening outlook for the economy.
“With export growth set to weaken on the back of sluggish global growth, and the lagged impact of last year’s rate hikes likely to weigh on activity, a rebound is unlikely,” he said.
Economic growth came in at 6.2 percent last year, short of the government’s downwardly-revised 6.5-6.9 percent target. The government is targeting a 7.0-8.0 percent expansion for 2019.
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