BSP stands pat on rates as inflation eases

By Karen Lema and Enrico Dela Cruz, Reuters

Posted at Dec 11 2014 04:45 PM | Updated as of Dec 12 2014 01:58 AM

MANILA (UPDATE) - The Bangko Sentral ng Pilipinas (BSP) left its key interest rate steady for a second straight meeting on Thursday, with easing inflation giving it leeway to extend a pause in tightening as growth prospects stay bright.

Moody's Investors Service raised the Philippines' credit rating to two notches above investment grade ahead of the policy decision - matching S&P's rating - saying there remained favorable prospects for strong economic growth.

The policy-making Monetary Board kept the overnight borrowing rate steady at 4.0 percent, as expected by all in a Reuters poll. It also left the rate on its short-term special deposit accounts (SDA) unchanged at 2.5 percent.

Easing food and fuel costs have allowed the central bank to lower its inflation forecasts for this year until 2016.

The monetary authority expects inflation this year to average 4.2 percent, lower than a previous estimate of 4.4 percent, before slowing to 3.0 percent in 2015 against a previous forecast of 3.7 percent.

The central bank sees inflation in 2016 at 2.6 percent against a previous estimate of 2.8 percent.

"On balance, the Monetary Board is of the view that prevailing monetary policy settings remain appropriate given the manageable inflation outlook and favorable domestic growth prospects," BSP governor Amando Tetangco told reporters.

Diwa Guinigundo, central bank deputy governor, told reporters the reduction in transport fares ordered by the government will slightly help ease inflation next year.

The central bank has said government efforts to ensure adequate supply and distribution of goods should help temper price pressures that could stem from any production losses arising typhoon Hagupit which battered central Philippine provinces this week.

The decision to keep interest rates steady should bode well for the economy, which is at risk of losing more momentum after typhoon Hagupit damaged P1.3 billion ($29.3 million) worth of rice crops and farm-related infrastructure.

Central banks in South Korea and New Zealand also kept interest rates on hold at policy meetings earlier on Thursday.

IMPROVED FISCAL MANAGEMENT

Moody's said in its statement on the Philippines' credit rating that the upgrade was helped by an ongoing reduction of the government's debt burden, structural improvements in fiscal management, and the country's resilience to global pressures faced by its emerging market peers.

The peso rose as much as 0.4 percent to 44.47 per dollar, its strongest since Sept. 25, after the upgrade.

A small majority of economists said the earliest the central bank will hike rates would be in the second quarter of 2015.

The central bank tightened monetary policy five times in as many meetings this year to tame price pressures from rising food prices early in the year. Apart from raising the main rate and the SDA rate, it also increased banks' reserve requirements.