2014: A year of sustained risks and proven resiliency for BSP

MANILA (PNA) — 2014 started as a manageable year for Philippine monetary officials since although inflation remains on the uptrend it remains within target.

Last January, rate of price increases rose to 4.2 percent from month-ago’s 4.1 percent.

This is within the government’s three to five percent full year target.

However, monetary officials remained cautions vis-à-vis the impact of rising inflation to price stability.

BSP is an inflation-targeting central bank, thus, monetary officials are always on the look-out for anything that would negatively impact inflation outlook and price stability among others.

Another factor that the BSP focused on earlier in the year is the growth of domestic liquidity, which peaked at 37.3 percent last January.

The strong M3 growth was a major concern of the BSP in 2013 due in part to the attractiveness of the domestic economy to foreign investors because of continued improvement of its fundamentals.

Last year, central bank’s policy-making Monetary Board (MB) implemented several measures to address sustained rise of M3.

These measures include the ban on foreign funds from tapping the central bank’s special deposit account (SDA) facility as well as the investment management account (IMA), which are retail investments pooled by banks, and the cut in the SDA’s interest rate.

With the adjustments in the SDA rules, deposits in the SDA facility have gone down to about Php 1 trillion after hitting almost Php 2 trillion in April 2013.

The normal M3 growth in the Philippines is at higher single digit to lower double digit.

M3 growth started to go down starting February this year and has not been a problem ever since.

As of last October, M3 grew by 15.4 percent year-on-year to P7.2 trillion.

With M3 becoming less of a problem, inflation, on the other hand, regained its sustained increase last April after it rose to 4.1 percent from month-ago’s 3.9 percent.

Among the major contributor to the faster rate of domestic price increases is the congestion in Manila ports after the City government of Manila implemented an expanded truck ban.

This problem persisted until late in the year but within this time, dialogues among national government officials, city officials and the private sector transpired to address the problem, which not only affected inflation but caused monstrous traffic congestion in neighboring cities.

Growth of the domestic economy was also affected, thus, economic managers put an extra effort to put the necessary solution to revive domestic expansion.

Last September, the City government of Manila eventually ended the implementation of the expanded truck ban.

Domestic inflation almost breached the higher end of the target last July and August when it hit 4.9 percent.

With inflation regaining its fast growth since the second quarter of the year, monetary officials put in place several policy measures starting with the one percentage point increase in banks’ reserve requirement (RR) last March, which took effect on April 4, 2014.

The increase in the RR was made to prevent potential risks to financial stability since M3 growth remained elevated and credit growth is robust.

The increase in RR last March was followed by a similar move last May still due to the high M3 growth.

But since inflation continue to creep up, the MB also implemented total of 50 basis points increase in the SDA rates as well as the key rates, with the latter made to ensure that inflation would be contained within target, particularly the 2015’s two to four percent target.

To date, the SDA rate is at 2.5 percent, the overnight borrowing or reverse repurchase (RRP) rate is at four percent, and the overnight lending or repurchase (RP) rate is at six percent.

The RRP and RP rates were maintained to record-low of 3.5 percent and 5.5 percent, respectively, after the last cut in October 2012.

It was first hiked this year last July followed by another 25 basis point increase last September.

BSP Governor Amando Tetangco Jr. said the series of policy actions enabled the central bank to ensure price stability in the economy.

He said the Board’s decision to keep steady the central bank’s key rates was made “based on its assessment that the inflation environment continues to be more manageable, with the risks to the inflation outlook remaining broadly balanced over the policy horizon.”

He attributed the balanced inflation outlook partly to “subdued outlook for global commodity prices.”

”The Monetary Board also noted that while global economic conditions remain challenging, prospects for domestic activity continue to be firm, supported by strong domestic demand, robust bank lending growth, and buoyant business sentiment,” he said.

The central bank chief noted that “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.”

“Going forward, the BSP will continue to monitor evolving price and output developments and remains prepared to take appropriate measures as necessary to ensure that the monetary policy stance continues to support an environment characterized by price and financial stability,” he added.

After the last policy meeting of the MB last December 11, the Board cut its inflation forecast for 2014 to 2016 due to its assessment of a more manageable inflation environment in the next few years.

To date, the BSP’s average inflation forecast for the three-year period is at 4.2 percent, three percent and 2.6 percent.

These were previously at 4.4 percent, 3.7 percent and 2.8 percent.

Continued drop in the price of oil in the international market, which has been posting record-lows, is among the factors in the cut in the BSP’s inflation target along with the lesser risk from the port congestion.

Monetary officials continue to see risks to rate of price increases and these include the petitions for utility rate hikes and the looming power crisis.

Relatively, as inflation continue to go down, with last November’s level already at 3.7 percent and the year-to-date average at 4.3 percent, economists discounted any movement in the BSP’s key rates until the second quarter of 2015.

ING Bank Manila senior economist Joey Cuyegkeng said lack of risks from inflation will likely make monetary officials keep the BSP’s key rates steady until the second quarter of next year.

“The moderating inflation reports of not only headline inflation but also core inflation deliver to BSP-MB policy space,” he said.

Also, investment bank Barclays sees the movement in the key rates in the last quarter of 2015.

“With a lower inflation profile and stable growth momentum, the BSP appears unlikely to further tighten monetary conditions, especially given the recently weak growth prints,” Barclays said.

In the third quarter of this year, the domestic economy posted a slower growth of 5.3 percent from quarter ago’s 6.4 percent and year-ago’s seven percent.

This growth rate, which economic officials maintain remains strong as it has been at over five percent for some years now, is among the reasons why risks to the central bank’s monetary policy has decreased.

”We recently pushed back our forecast of further monetary tightening to Q4 15, after when the Fed is expected to have started raising rates,” Barclays said in a recent market outlook.

Analysts expect US’ Federal Reserve start hiking its key rates in the middle of 2015 after it ended the implementation of its stimulus program last November.

The start of policy normalization in the US is expected to result to similar trends in interest rates around the globe as well as capital flight back to the world’s largest economy.

Amid the expected normalization in US’ interest rates, Philippine monetary officials are confident that this will not have a big impact on the domestic economy in general because of improved fundamentals.

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