February 8, 2018 / 8:19 AM / 9 months ago

Philippine central bank holds rate steady, says inflation spike will moderate

MANILA (Reuters) - The Philippines’ central bank held interest rates steady on Thursday and poured cold water on expectations that it will hike this year, insisting that a sharp spike in inflation will prove temporary and price pressures will ease next year.

A security guard stands beside a logo of the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) posted at the main gate in Manila, Philippines April 28, 2016. REUTERS/Romeo Ranoco/File Photo

The policy-making Monetary Board voted to keep the overnight borrowing rate steady PHCBIR=ECI at 3.0 percent, as well the rates on its lending and deposit facilities. It also left reserve requirement ratio for banks unchanged.

“While latest baseline forecasts show higher inflation outturns for 2018, the inflation path is expected to moderate and settle within the inflation target range in 2019,” a statement from Governor Nestor Espenilla said.

Citing price pressures from higher taxes, rising food and fuel prices, the central bank raised its forecast for average inflation this year to 4.34 percent - above its 2-4 percent target for 2018 and 2019 - from 3.4 percent.

But it expects inflation to return to its comfort range next year, with the average print seen at 3.49 percent, albeit faster than its previous forecast of 3.2 percent.

Economists were caught by surprise after annual inflation in January quickened to a more than three-year high of 4.0 percent, prompting some of them to bring forward their rate hike expectations to March.

Nine of 12 analysts in a Reuters poll had predicted no change in rates on Thursday. The rest projected a hike.

STANDING READY

The central bank remains watchful against signs of second-round effects and inflation becoming broader-based, Espenilla said, adding that policymakers “stand ready to take appropriate measures” as needed to keep prices stable.

Gareth Leather, senior Asia economist at Capital Economics in London, said he was sticking to his view that interest rates would remain unchanged throughout 2018.

The Philippines last year held its spot as one of the fastest-expanding economies in Asia, posting 6.7 percent growth and sustaining expectations the central bank could tighten monetary policy this year.

After many years of current account surpluses, the Philippines now faces deficits, and that is a source of concern to some economists.

But the central bank governor told Reuters on Thursday that the Philippines’ external position is underpinned by strong remittances, exports and outsourcing contracts.

He said the current account deficit reflects the Philippines’ solid economic expansion, which has driven higher imports of capital goods, raw materials, and other commodity items.

Writing by Karen Lema; Editing by Richard Borsuk

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