UPDATE1: Philippine central bank keeps interest rate 4.75% as inflationary pressures ease

14, Dec. 2018

――Adds official, economist comments from 11th paragraph

MANILA, NNA – The Philippine central bank maintained its monetary policy stance Thursday, leaving its benchmark short-term interest rate at 4.75 percent, after tightening credit for the fifth straight time last month.

The no-change decision by the policy-making board of Bangko Sentral ng Pilipinas was widely expected as the latest data had shown deceleration in inflation.

“Recent headline inflation readings indicate signs of receding price pressures as constraints on food supply continue to ease with the implementation of various non-monetary measures,” the BSP said in a statement.

“Inflation expectations have also steadied given the decline in international crude oil prices and the stabilization of the peso.”

Looking ahead, the bank said, the risks to the domestic inflation outlook have become “more evenly balanced” for 2019 and leans toward the downside for 2020 amid more uncertain global growth, which could further mitigate upward pressures from commodity prices.

“Given these considerations, the Monetary Board deemed it prudent for the time being to keep monetary policy settings steady and allow previous monetary responses to continue to work their way through the economy,” said the bank.

The central bank “remains vigilant” against developments that could affect the outlook for inflation and financial stability.

The BSP said it is “prepared to take further policy action as appropriate” to safeguard its price stability mandate.

Annual inflation in the Philippines posted the first slowdown this year, easing to 6 percent in November from 6.7 percent in October on lower food prices, but it was still well above the 3 percent seen a year earlier, the Philippine Statistics Authority said last week.

But the core CPI excluding volatile food and energy prices -- a key measure of the long-term inflation trend -- picked up to 5.1 percent in November from 4.9 percent the previous month and 2.4 percent in November 2017.

This does not concern BSP policymakers so much because the rise in the core reading in November was mainly driven by a temporary hike in fares for public utility jeepneys, which the government has already withdrawn this month.

“But as of December this year, there has been a rollback in jeepney prices that should help moderate core inflation,” Franciso Dakila Jr., BSP’s Assistant Governor for the Monetary Policy Sub-Sector told a news briefing Thursday.

The annual inflation rate averaged 5.2 percent in the first 11 months of this year, which is still higher than the government’s inflation target range of 2 to 4 percent.

“We are a lot more comfortable [than before] that the 2018 inflation target will be achievable,” Dakila said.

The BSP downwardly revised its inflation projections for this year to 5.20 percent, 3.18 percent for 2019 and 3.04 percent for 2020.

“This is consistent with our previous experience where we would have a very sharp increase in inflation and then a few months later we would see a fast-steady deceleration. [this is] consistent with the notion that supply shocks are not a permanent influence on inflation,” Dennis Lapid, BSP’s director of the economic research, explained.

In line with the BSP’s forecast, Hirofumi Suzuki, an economist at Sumitomo Mitsui Banking Corp., said the country’s inflation will likely continue to slow down towards 2019.

“Rising interest rates may subdue investment to some extent. However, the economic fundamentals in the Philippines seem to be robust,” he said. “The impact of interest rate [hikes] should be limited.”

Suzuki said he expects the U.S. Federal Reserve to raise rates twice next year, which would help the peso depreciate and support exporter profits.

The BSP may not have to raise lending rates in 2019, noting the central bank would continue monitoring closely the higher core CPI.