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The central bank of Philippines kept its policy stance unchanged at the monetary policy meeting held Thursday, revising upward the country’s future inflation forecast. The central bank is expected to tighten its policy tools by Q3 2017 on the back of a likely boost from increased infrastructure spending.
The Bangko Sentral ng Pilipinas (BSP) left its policy tools unchanged, with the overnight policy rate at 3.00 percent, overnight deposit rate at 2.50 percent, and reserve requirement ratio at 20 percent. The central bank also revised upwards its inflation forecasts to 1.8 percent for 2016, 3.0 percent for 2017 and 2.9 percent for 2018 (from 1.7, 2.9, and 2.6 percent respectively).
Despite the resilience in domestic demand, headline inflation numbers have been slow to rise. While 2016 inflation will likely remain below the central bank’s target range, inflation in 2017 and 2018 is expected to slowly rise back to target.
Further, Credit growth has remained resilient, in line with the growth in private investment. Loan growth rose to 16.4 percent y/y in September, with the growth contribution of the real estate and construction sectors broadly steady. Loans to manufacturing are rising in line with strength in industrial production.
"We expect the BSP to be the first central bank in the region to tighten its policy tools by Q3 2017. We expect GDP growth to have remained robust at 6.9 percent y/y in Q3, marginally lower from the 7.0 percent print in Q2," ANZ commented in its latest research report.
The robust expansion in industrial production amidst persistent contraction in exports suggests that domestic demand provided an offset. Growth in government spending moderately eased after the elections in May, leading to a sequential easing to 1.5 percent q/q on a seasonally adjusted basis, from 2.3 percent in Q2.
Meanwhile, the central bank has more time to facilitate the gradual migration of excess liquidity to its new term deposit facility (TDF).
