Philippine central bank keeps interest rates steady on lower inflation outlook

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo announces the latest monetary policy stance on Feb. 7, 2019.

MANILA, NNA - The Philippine central bank kept its benchmark short-term interest rate unchanged at 4.75 percent Thursday as expected after consumer price rises further decelerated in January.

The decision was based on its assessment of “a more manageable inflation environment,” the Bangko Sentral ng Pilipinas (BSP) said in a statement, forecasting slower inflation for 2019 on the assumption that oil prices will be lower.

Economists expected the central bank to maintain its overnight lending rate as consumer prices increased at a pace of 4.4 percent last month, slower than 5.1 percent in December 2018, which itself was the lowest in 10 months.

The Philippine Statistics Authority attributed the slower rate of increase to the heavily weighted food and non-alcoholic beverages index, which recorded a slower rise of 5.6 percent last month compared with 6.7 percent in December.

Excluding selected food and energy items, core inflation -- a key measure of the long-term inflation trend -- eased further to 4.4 percent in January from 4.7 percent the previous month.

The BSP projects slight inflation deceleration this year to 3.07 percent from its December forecast of 3.18 percent, and to 2.98 percent in 2020 from 3.04 percent, both within the government’s target range of 2 percent to 4 percent for 2019 and 2020.

The central bank attributed the outlook for a deceleration this year to “the decline in international crude oil prices and the normalization of supply conditions of key food items” such as rice.

“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,” it said.

The monetary board “deems the prevailing monetary policy settings to be appropriate, as previous monetary responses continue to work their way through the economy.”

Philippines inflation, which peaked in September and October last year at 6.7 percent, had prompted the central bank to raise the benchmark rate by a total of 175 basis points from May through November. The BSP kept rates steady in December after the country registered slower consumer price increases.

Nicholas Mapa, senior economist in Manila for ING Bank, said the latest inflation forecast validates what the central bank has done with its tightening cycle, and added policy makers may opt for a reversal given the easing inflation.

“Given the supply-side nature of the recent inflation spike, we can expect price pressures to dissipate further even as the Rice Tariffication Bill remains unsigned and crude oil prices remain muted,” Mapa told NNA.

Mapa also expects the BSP to slash the overnight reserve repurchase (RRP) rate by 25 basis points as soon as May as inflation is forecast to slow to within the government’s target.

“Now that the inflation threat appears safely in their rear view mirror, we can see the central bank easing off the brake pedal ever so slightly by cutting rates in May after reducing the RRR (reserve requirement ratio) in 1Q,” Mapa said.

“With growth expected to teeter close to the edge of 6 percent, given the recent budget delay, and with the inflation objective safeguarded, perhaps the BSP may finally opt to give the economy an added boost to regain flagging growth momentum,” he added.