BSP keeps rates steady amid low inflation, strong growth

by Karen Lema and Enrico Dela Cruz, Reuters

Posted at Mar 26 2015 04:31 PM | Updated as of Mar 27 2015 01:37 AM

MANILA (UPDATE) - The Philippine central bank left its benchmark interest rate unchanged at 4.0 percent on Thursday, as expected, saying inflation will stay well within its comfort range this year and next while economic growth is expected to remain robust.

The policy-making Monetary Board voted to keep the overnight borrowing rate steady at 4.0 percent for a fourth straight meeting, bucking a global tide of policy easing.

The board also kept the rate on its short-term special deposit accounts (SDA) steady at 2.5 percent as well as banks' required reserves at 20 percent.

"The inflation environment continues to be manageable," acting Governor Diwa Guinigundo told a media briefing.

Easing food and fuel costs allowed the central bank to trim its 2015 inflation forecast to 2.2 percent from 2.3 percent.

But it kept its average inflation estimate for 2016 at 2.5 percent, noting upside risks from possible changes in utility rates and power shortages this year. The estimates are below the midpoint of its 2-4 percent targets for 2015 and 2016.

Unlike some of its neighbors which have eased policy recently to spur growth, the Philippines is expected to remain one of the fastest-growing economies in Asia, with the government targeting a 7-8 percent expansion this year.

The Bank of Thailand cut interest rates this month in a surprise move. India has cut rates twice already so far this year and China has eased policy two times, with more expected. Singapore, Australia and Indonesia have also eased.

Guinigundo said the economy does not need more monetary stimulus as demand remains robust, adding that fiscal stimulus may be more appropriate at this time, if any was needed.

All 11 analysts in a Reuters poll had predicted the BSP would keep the overnight borrowing rate steady.

Six of the 11 think the central bank's next move will be a rate hike, but the timing will probably be determined by the direction of oil prices and interest rates in the United States.

"We see likely improvement in fiscal spending to provide additional support for the economy. This should give the central bank enough room to maintain current monetary conditions through 2015, despite the upward pressure in inflation due to rising electricity prices and minimum wages," ANZ said in a note to clients after the rate decision.

One economist predicted a cut in banks' reserve requirement ratio in May to curb the peso's PHP= strength, which is causing headaches for exporters and dependents of overseas Filipino workers whose remittances are considered a pillar of the economy's growth.

The central bank continues to adhere to a flexible exchange rate regime, one that is dictated by market forces, Guinigundo said. But he said there was "scope" for the central bank to participate in the currency market to smoothen sharp swings.

"But we don't tamper with the exchange rate, and choosing winners and losers in the process," he said.

Inflation likely remained moderate in March, with the central bank estimating the consumer price index rose 2.1-2.9 percent for the month after a 2.5 percent reading in February.