Philippines Downplays Rate Increases Even as Economy Booms

(Bloomberg) -- The Philippine central bank kept its benchmark interest rate unchanged at a record low, downplaying the need to follow the U.S. Federal Reserve in tightening monetary policy even as concerns the economy may be overheating remain.

Bangko Sentral ng Pilipinas held the overnight reverse repurchase rate at 3 percent, it said in a statement on Thursday, as forecast by 17 of 19 economists in a Bloomberg survey. Two predicted an increase to 3.25 percent. The bank projected annual inflation will remain within the 2 percent to 4 percent target until 2019.

Policy makers seem to be in no rush to raise interest rates even as economists predict a booming economy and a currency that’s the weakest in Asia will push the central bank to raise rates as early as the first quarter of 2018. The bank gave no signal it’s preparing to move in a decision that came hours after the Fed hiked and China’s central bank lifted borrowing costs.

Philippines Downplays Rate Increases Even as Economy Booms

“There’s hardly any need to tighten monetary policy,” Deputy Governor Diwa Guinigundo told reporters in Manila, referring to Thursday’s decision. “We’re saying this because the so-called overheating concerns due to high credit growth are at least misplaced.”

The economy is expanding more than 6 percent a year, the current account is forecast to be in deficit for the first time in 15 years and bank loans are growing close to 20 percent. Rising oil prices and the approval in Congress on Wednesday of a tax bill that raises levies on oil and coal are also set to boost inflation pressure.

The central bank may consider a new tenor for its term deposits while currency assumptions that the economic team uses for projections may be revised on Friday, Guinigundo said.

Central Bank CPI Forecasts201720182019
New 3.2%3.4%3.2%
Nov. 3.2%3.4%3.2%

“The tax reform will likely raise inflation expectations significantly,” said Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore. “Our initial take suggests the changes should push inflation in 2018 above the 4 percent upper target of the central bank. We stand by our call for policy tightening to commence in the first quarter.”

Consumer prices climbed 3.3 percent in November from a year ago, down from 3.5 percent in October. Inflation is very stable despite the fast growth in credit and the impact of the tax bill is seen tempered and transitory, Guinigundo said.

What Our Economist Says...

“They have the confidence because:
  • domestic demand continues to soften
  • oil prices are softening
  • the peso is strenghtening
  • the tax reform on balance may not lift inflation much
The key is domestic demand. As long as that continues to soften, I believe rates are going nowhere.”

--Tamara Henderson, Bloomberg Economics

©2017 Bloomberg L.P.