Philippines: Central Bank keeps rates unchanged at its May meeting
May 15, 2017
At its meeting on 11 May, the Philippine Central Bank decided to leave the Overnight Reverse Repurchase facility (RRP) unchanged at 3.00%, and also kept the Overnight Lending Facility (OLF) and the Overnight Deposit Facility (ODF) unchanged at 3.50% and 2.50% respectively. The ODF establishes the floor and the OLF the ceiling of the interest rate corridor system. Likewise, the Bank kept the reserve requirement ratios untouched. All decisions were in line with market expectations.
The Bank’s decision came as the Philippines’ economy continues to enjoy robust growth, underpinned by strong private consumption and external demand, especially from China. Although annual average inflation has been rising steadily in recent months, reaching a 21-month high of 2.5% in April, it remains below the Central Bank’s central target of 3.0%. Inflation in recent months has been driven by higher food and oil prices and base effects. However, oil prices are showing notable weakness and the low base effect will fade out in the coming months, which will likely ease price pressures going forward. Consequently, the Bank maintained its inflation projections at 3.4% this year and 3.0% in 2018. The decision not to increase rates gives the Bank more leeway in future policy meetings to adopt a tighter monetary policy if inflation comes in higher than forecast.
The statement was devoid of strong forward guidance. Some hints regarding future developments came from mentions of inflation risks being tilted to the upside, due to possible hikes in electricity tariffs and the impact of the government’s proposed tax reform. This, together with the ongoing phase of robust economic growth, suggests that the Bank may tighten its monetary stance slightly in the near future.