BSP sees no change soon for policy rates

By Riza Lozada

The Bangko Sentral ng Pilipinas (BSP) does not expect to change its current monetary policy settings anytime soon as it said inflation forecasts remain consistent with its target range including over the horizon.

“With manageable inflation dynamics, low inflation expectations, and favorable prospects for domestic demand, the stance of monetary policy can continue to be kept steady for the near term,” the BSP said in its recent inflation report.

“Global growth is expected to be modest, with commodity prices likely to remain muted,” it added.

The BSP said that, even if inflation pressures remain subdued, prospects for domestic economic activity continue to remain favorable on the back of stronger growth in manufacturing and public sector construction. Continued growth in liquidity and credit conditions indicate that overall monetary conditions remain sufficiently accommodative with respect to supporting economic activity.

At the same time, there continues to be ample room for fiscal policy to provide an additional boost to domestic demand through infrastructure and social spending, the report said.

“On balance, the BSP is of the view that current monetary policy settings remain appropriately calibrated. Going forward, the BSP will continue to monitor domestic and external developments to ensure that the monetary policy stance remains consistent with its price and financial stability objectives,” the BSP said in the report.

Headline inflation in the second quarter of 2016 increased to 1.5 percent from the first-quarter average of 1.1 percent.

This brought average inflation for the first six months of the year to 1.3 percent, lower than the government’s range target of from 2 percent to 4 percent until 2018.

The higher headline inflation print during the quarter was driven by higher prices of food commodities amid tighter domestic supply.

“Similarly, non-food inflation rose on service-related Consumer Price Index (CPI) items, as well as clothing and footwear.

Core inflation edged up to 1.7 percent from 1.6 percent in the previous quarter,” the report said. It also said real gross domestic product (GDP) grew by 6.9 percent in the first quarter due to accelerated consumer spending and fixed capital investments.

Vehicle sales remained brisk, while the composite Purchasing Managers’ Index (PMI) stayed above the 50-point expansion threshold.

“Business sentiment improved, while consumer sentiment was broadly steady, supporting the view that demand conditions would remain firm moving forward amid sustained credit growth and notable improvements in employment conditions,” the BSP said.

The Philippine equities market rallied as the stronger-than-expected GDP growth and credible election outcomes resulted in bullish investor sentiment, the BSP noted.

“Investor appetite for local currency government securities also remained healthy, although uncertainty on the external front was reflected in the wider spreads on the country’s debt and risk premiums.

Nevertheless, the Philippine banking system remained sound, as assets, lending, and deposits continued to expand and as capital adequacy ratios remained comfortably above the BSP’s prescribed levels and international norms.

In addition, lending standards for bank loans to both enterprises and households were also broadly unchanged during the quarter, indicating a generally stable supply of credit,” the report said.

The BSP noted that several external factors, as well as domestic developments, such as the national elections in May, were key movers of Philippine financial markets.

“By contrast, economic activity in Japan eased further, while the severe downturn in Brazil persisted. Key indicators also pointed to a weaker manufacturing sector in China.

The continued weak growth outlook for emerging market economies combined with the absence of a solid economic rebound among advance economies led a number of central banks to ease their monetary settings in order to support economic activity,” the BSP reported.