Philippines: Central Bank stands pat but signals rate hikes in the near future at March meeting
March 22, 2018
At its meeting on 22 March, the Central Bank decided to leave the Overnight Reverse Repurchase Facility (RRP) rate unchanged at 3.0%. It also left the Overnight Lending Facility (OLF) and the Overnight Deposit Facility (ODF) rates steady at 3.5% and 2.5%, respectively. Moreover, the Bank kept the reserve requirement ratio untouched—it had been cut from 20% to 19% on 15 February. The decision to keep rates unchanged was due mainly to the fact that inflation for 2018 and 2019 is projected to stay within the Bank’s target of 3.0% plus or minus 1 percentage point. The ODF establishes the floor, and the OLF establishes the ceiling of the interest rate corridor system. A majority of market analysts expected this decision, although a sizeable minority expected interest rates to rise.
The latest decision followed mounting inflationary pressures, along with robust economic growth. Households are benefiting from increased disposable income due to the income tax cuts contained in the Tax Reform for Acceleration and Inclusion (TRAIN) that came into effect in January, as suggested by solid data on retail sales in January. However, according to PMI readings for the first two months of 2018, the manufacturing sector could be going through some weakness, restrained by higher excise taxes on various goods under TRAIN. Moreover, external demand seems to have cooled somewhat between the end of 2017 and the beginning of 2018. That said, consumer and business sentiment remain buoyant, and fast credit growth continues to underpin economic activity; the strong pace of economic and credit growth could result in rising price pressures. Consequently, the majority of FocusEconomics panelists project at least one rate hike this year.
Inflation in February jumped for the second consecutive month. It came in at an over three-year high of 3.9%, up from January’s 3.4% and just below the upper band of the Central Bank’s 2.0%—4.0% target. Price pressures in February intensified mainly due to the impact of the TRAIN reforms. Moreover, risks remain tilted to the upside, partly due to robust domestic demand, strong growth in credit and liquidity, and pending petitions for adjustments in minimum wages and transportation fares. However, social safety nets and transport subsidies should temper inflationary pressures over the medium term. Additionally, the proposed reform on tariffs in the rice industry should further ease inflation.
In its communiqué, a change in tone could be observed. Due to rising inflation expectations, the Banks stated it stands ready to hike rates in the coming months. It also expressed its belief that robust growth will allow the economy to smoothly absorb a more restrictive monetary stance. As the Bank remains concerned about both inflationary pressures and the strong economic performance, future rate hikes would likely be implemented with a view toward protecting growth prospects.
Philippines Interest Rate Forecast
Against this backdrop, FocusEconomics Consensus Forecast panelists expect that the Central Bank will raise the RRP this year, with an average forecast of 3.54% for the end of 2018 and 3.92% for the end of 2019.