Philippine central bank leaves policy settings unchanged, may start hiking rates by end-Q2 2017

As expected, the Philippine central bank, BSP, kept its policy settings unchanged. In spite of the strong growth in domestic demand, there is no risk of breaching the upper band of BSP’s 2 percent to 4 percent inflation  target range in the next 18 months, noted ANZ in a research note. The BSP revised down its inflation forecast for 2016 from 1.8 percent to 1.7 percent year-on-year, while it maintained the forecasts of 2017 and 2018 at 2.9 percent and 2.6 percent respectively.

However, ANZ projects inflation to come in at 1.9 percent year-on-year in 2016 and at 3 percent in 2017. But there are downside risks to this inflation projection, according to ANZ. As of August, inflation year-to-date has averaged 1.5 percent year-on-year. Even of the Philippine government were to hike excise taxes on oil by PHP 6 per litre, central bank projections indicate towards a rise of 0.6 percentage point to the average 12-month inflation. Therefore, inflation projections would possibly remain anchored within the target range of the central bank, added ANZ.

Excess liquidity is gradually migrating to BSP’s term deposit facilities (TDP) The structural excess liquidity has created a wedge between short-term market rates and the central bank’s policy rate for many years. Since the central bank introduced the TDF and interest rate corridor framework in June, the BSP has been gradually increasing the volume of the auction to facilitate the migration of funds from the overnight deposit facility to the 7-day and 28-day TDF’s. The recent adjustment would see the volume rise to PHP 110 billion by October 5 from PHP 98 billion.

“For now, we are still pencilling in interest rates hikes to commence at the end of Q2 2017”, said ANZ.