ANZ sees no change in BSP rates until December

Any change in the Bangko Sentral ng Pilipinas (BSP) policy rates is expected to happen only in the first half of 2017, the Australia and New Zealand Banking Group Ltd (ANZ), the fourth largest bank by market capitalization in Australia, said after the BSP kept monetary policy settings unchanged last week. 

In a research note, ANZ said “seamless transition” on the newly implemented Interest Rate Corridor (IRC) was among the factors on the central bank’s policy-making Monetary Board’s (MB) decision to retain rates.

The MB decided to maintain the interest rate on the BSP’s overnight reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept steady.

The central bank cut RRP rate last month to 3 percent from 4 percent, in line with the implementation of Interest Rate Corridor (IRC).

The IRC also identified overnight lending or repurchase (RP) ceiling rate at 3.5 percent and floor rate at 2.5 percent. Overnight deposit facility is also at 2.5 percent. The MB also left reserve requirement ratios unchanged.

It was the 14th consecutive decision of MB to hold monetary policy settings.

ANZ said sustained low-inflation environment, with the central bank even cutting its 2016 average inflation forecast to 2 percent from 2.1 percent, was also a big factor in the decision to retain policy rates.

The study said the MB’s decision during the day was “as expected” since “marginal revision were confined to prices with the activity outlook unchanged.”

”We maintain our view that the central bank will likely keep neutral through 2016 and expect tightening to commence in the first half of 2017,” it said.

The Board maintained its 2017 average inflation forecast at 3.1 percent and sees this to go down to 2.6 percent in 2018.

ANZ expects the rate of price increases in the domestic economy to average at 1.9 percent this year but rise to 3 percent next year.

”While the risks of continued contraction in the agricultural sector have a limited effect on overall GDP (gross domestic product) growth, weakness in agriculture will be more evident in rising inflation,” it said.

The government’s inflation target for 2016-18 is a range between two to four percent.

BSP Deputy Gov. Nestor Espenilla said the MB’s decision to maintain key policy rates is due to the manageable inflation environment.

“Latest forecasts indicate that average inflation is likely to settle near the lower edge of the three percent ± one percentage point target range in 2016 and rise toward the mid-point of the target range in 2017 and 2018,” he added.

In first quarter of this year, inflation slightly increased to 1.1 percent from one percent in the previous quarter, still at the lower end of the government’s target.

Espenilla mentioned that overall balance of risks surrounding the inflation outlook is deemed to be broadly balanced.

The risk of second-round effects from lower oil prices is likely to recede in the period ahead due to the recovering of global oil prices.