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Philippines Monetary Policy February 2018

Philippines: Central Bank stands pat at February meeting on manageable inflation

At its meeting on 8 February, the Central Bank of the Philippines (BSP) decided to leave the Overnight Reverse Repurchase Facility (RRP) rate unchanged at 3.0%. The BSP last hiked interest rates in September 2014. Moreover, it kept the Overnight Lending Facility (OLF) and the Overnight Deposit Facility (ODF) rates steady at 3.5% and 2.5%, respectively. The ODF establishes the floor, whereas the OLF establishes the ceiling of the interest rate corridor system. Finally, the Bank left the reserve requirement ratios untouched. The decisions were motivated by manageable inflation and well-anchored inflation expectations; all decisions were in line with market expectations.

Manageable and within-target inflationary pressures, and robust economic growth were the key drivers of the BSP’s decisions, as domestic demand remains buoyant and the global economic recovery continues at a sustained pace. GDP expanded 6.6% year-on-year in Q4; economic growth was again spurred by strong private consumption and fixed investment, as well as the government’s ongoing infrastructure push. Meanwhile, the external sector’s contribution to growth swung from positive to negative in Q4, as import growth accelerated on the back of stronger domestic demand. Moving into 2018, the PMI for January suggests the pace of economic activity moderated in the manufacturing sector, which nevertheless continued to enjoy expansionary conditions.

Inflation accelerated to 4.0% in January, up from December’s 3.3%, marking an over three-year high. Price pressures in January intensified on the back of higher excise taxes imposed by the Tax Reform for Acceleration and Inclusion (TRAIN), which came into effect on 1 January. The Bank thus considers the spike in inflation to be transitory, and forecasts that inflation will return to within the inflation target range of 3.0 percent plus or minus 1.0 percentage point in 2019. However, inflationary risks remain tilted to the upside, mainly due to possible future increases in oil prices.

In its communiqué, the Bank stated that the current monetary policy stance should be maintained going forward. However, it also specified that it will stand ready to take the actions deemed necessary to safeguard price and financial stability, as well as economic growth.

Philippines Interest Rate Forecast

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