BSP: Strong growth drivers justify move to keep policy rates steady

MANILA, Philippines - Monetary officials continue to see a healthy economic growth this year on the back of tempered inflation, justifying its recent decision to keep historically low policy rates steady.

“Recent indicators of activity since the policy meetings in January suggest that domestic drivers of growth remain firm,” according to the highlights of the last Monetary Board policy meeting released on Thursday. 

“Growth is also likely to be supported by election-related spending and the government’s accelerated spending program,” it added. Gross domestic product (GDP) expanded by an above-target 6.6 percent last year. 

In its last policy meeting on March 14, the Bangko Sentral ng Pilipinas (BSP) kept policy rates unchanged at their record-lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

It nonetheless slashed the interest it charged on special deposit accounts (SDA) by another 50 basis points to 2.5 percent. The first cut was made on Jan. 24. The next policy meeting will be held April 24.

According to the BSP, indicators such as vehicle and energy sales have been strong as of the first quarter, while wholesale and retail services continued to gain support from a reviving manufacturing sector.

Factory output, which grew by a slower 8.7 percent in February, remained on growth territory according to the latest Purchasing Managers’ Index survey. Demand for loans, which went up 15.4 percent in January, also pointed to sustained expansion.

The latest reading on business confidence index, which decreased to 41.5 percent from 49.5 percent in the first three months, also suggested “buoyant sentiment” on the part of investors and firms.

This comes as the Philippine Stock Exchange (PSE) index, which closed at 6,831.74 on Thursday, was up 15.6 percent for the first quarter, while the peso has strengthened to 40.67 versus the greenback.

Corporate bond issuances amounted to P84 million, while total equity raised in the PSE reached P204.6 million, reflecting continued fund-raising for future projects. 

While growth is expected to hold up, inflation is seen to remain within target for this year. The BSP targets inflation between 3 to 5 percent in 2013 and 2014. 

Within the target though, an inflation outlook of 3.3 percent for both years has been set, faster than originally estimated. The central bank said this took into account “higher GDP growth rate” and looming power rate adjustments.

“Although global economic activity has gained further traction, lingering fiscal and financial market stresses in advanced economies also continued to dampen the broad outlook, thereby mitigating upward pressures on commodity prices,” the BSP explained. 

Going forward, monetary authorities said it will “continuously monitor” local and external developments and “employ macroprudential measures” versus capital flows “as necessary.”