For 10th straight meeting BSP holds interest rates steady

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) decided yesterday to keep its key policy rates steady despite the US Federal Reserve action to raise its near zero interest rates by a quarter of a percentage point for the first time in nearly a decade.

BSP Governor Amando Tetangco Jr. said the central bank’s Monetary Board has decided to keep interest rates steady amid the firm domestic demand conditions and benign inflation environment.

“With these considerations, the Monetary Board believes prevailing monetary policy settings are appropriate given the outlook for inflation and domestic economic activity,” Tetangco said.

This was the 10th straight policy-setting meeting since October last year that the BSP has decided to keep policy rates untouched.

The overnight borrowing rate is currently pegged at four percent, while the overnight lending rate is at six percent. The interest rates on special deposit accounts and the reserve requirement ratios were likely left unchanged.

Tetangco said the BSP considered the potential impact of the recent monetary policy adjustment in the US on global financial conditions.

“The Monetary Board has considered the potential impact of the recent monetary policy adjustment in the US on global financial conditions, noting that keeping monetary policy settings steady at this juncture would allow the BSP some room to continue to assess evolving global economic conditions and calibrate its policy tools as appropriate,” Tetangco said.

Tetangco said in a text message the action of the US Fed brings an end to the liftoff uncertainty.

“The Fed’s statement should anchor confidence on the path of growth and inflation in the US. We may see the US yield curve flatten, which would be positive for emerging market economies that have exposures in the long end of the curve or are planning to tap this sector for funding,” he said.

The BSP chief said regional currencies have already moved lower versus the US dollar in recent weeks.

“This may continue, as would the outflows, but possibly not in significant magnitudes as in the past. The Fed promised gradual hikes,” Tetangco said.

Tetangco said the gradual rate hikes would be moderated as the US enters an election year.

“That said, on balance, the Fed action should be constructive for emerging market economies,” Tetangco said.

He explained the BSP’s decision was based on its assessment of inflation dynamics and the risks to the inflation outlook over the horizon.

Inflation kicked up to 1.1 percent in November from a record low 0.4 percent in October due to a spike in food prices. This brought the average inflation to 1.4 percent in the first 11 months of the year, way below the BSP target of two percent to four percent for this year.

“Potential upside pressures could come from the impact of prolonged El Niño dry weather conditions on food prices and utility rates as well as pending petitions for power rate adjustments, while downside risks could arise from possible slower-than-expected global economic activity,” he said.

The BSP chief said monetary authorities also observed that domestic demand conditions are likely to stay firm, supported by solid private household and capital spending, buoyant market sentiment, and adequate domestic liquidity.

BSP Deputy Governor Diwa Guinigundo said monetary authorities adjusted its inflation forecasts for 2016 and 2017 due to the higher inflation in November, the impact of the weakening pesos against the US dollar, and the increasing price of key commodities due to weather disturbances.

The BSP’s Monetary Board, he said, raised its inflation forecast to 2.4 percent instead of 2.3 percent for 2016 and to 3.2 percent instead of 2.9 percent for 2017.

Guinigundo said monetary authorities maintained its inflation forecast at 1.4 percent for this year.

Meanwhile, Fitch Ratings associate director for sovereign ratings Mervyn Tang said the external finances of the Philippines is a key credit strength as the debt watcher maintained a positive outlook on the country.

“In Fitch’s view, steady current account surpluses since 2002 have led to a large build-up in foreign exchange reserves and that makes the Philippines more resilient than many other emerging market economies to any shift in global investor sentiment, following the Fed rate hike,” Tang said.