MANILA – The punch bowl will stay, at least for now. Defying calls from some forecasters, the Bangko Sentral ng Pilipinas held fire and kept benchmark interest rates unchanged at a record low, confident that inflation will behave within target.
That means the overnight borrowing rate remains at 3%, while the overnight deposit stays at 2.5%. Not counting the shift to the interest rate corridor, policy settings haven’t moved since September 2014.
Bangko Sentral Governor Nestor Espenilla maintained that there are no signs of overheating as price increases due to tax reform are not broad-based.
“This is the classic dilemma of the central bank as a party pooper. When does the central bank take away the punch bowl? The party is going on do you need to immediately take away the punch bowl? The central bank doesn’t need to take away the punch bowl, it is not yet the time and that is part of our responsibility as part of the economic team,” Espenilla said Thursday.
Using the new base year of 2012, the BSP expects inflation this year at 3.9%, which is within the target of 2-4%.
Price increases are expected to peak by the third quarter, and taper off thereafter.
As Espenilla explained, “What we are saying right now is there is no reason to move the policy rate because the data is not providing evidence of that but we also recognize that, our position is based on forecasts, our best forecast today on how inflation would move forward and there are measures being taken that our main scenario happen.”
Deputy Governor Diwa Guinigundo said, “The BSP decided to keep the monetary policy steady because of the favorable reading of inflation down the road.”
Coming off the US Federal Reserve’s 25-basis-point rate hike, the BSP stressed that the Fed’s position was considered, but that their decision remained independent and tilted towards domestic considerations.
Nevertheless, monetary authorities are prepared to pull the trigger should the need arise.
Guinigundo said: “We need to convey to the market that if there is, if it is warranted, the Monetary Board is prepared to tighten the monetary policy. I think this is to address the continuing fears or nervousness among market analysts that it looks like the BSP is behind the curve. We are not behind the curve.”
There certainly have been fears. International banks like JP Morgan, DBS and Nomura have been urging the BSP to act sooner rather than later, as global crude prices stabilize above $60 a barrel and the peso continues to depreciate against the greenback.
Since the start of the year, however, both the BSP and NEDA had repeatedly sought to dampen calls for liftoff, pointing out that the rice tariffication and conditional cash transfers should offset upward price pressures.
In its policy statement, the central bank did drop a hint of a possible change in direction in the coming months…by casually mentioning the phrase “policy tightening if warranted”. It also says it will remain watchful of second-round effects of TRAIN.
How the market watchers read that will be subject to debate until the next BSP meeting in May.