Manila central bank keeps rates steady, ends easing cycle

The Philippine central bank kept interest rates steady on Thursday, ending its eight-month easing campaign as expected and saying it will keep borrowing costs steady for as long as it will be necessary. The pledge, combined with the central bank's forecast that inflation this year and next should stay safely within the target, convinced analysts that interest rates would stay at their current record low until next year.
"Given the evolving g global environment, we will keep policy rates steady for as long as necessary" deputy governor Diwa Guinigundo told reporters after the central bank kept its key overnight borrowing rate at 4.0 percent. "They will probably keep the overnight borrowing rate at a record low until the first quarter of next year," said Jonathan Ravelas, chief market strategist at BDO Unibank in Manila.
Others said they believed the central bank may wait until after general elections in May before raising rates. While economists expected no rate tightening for months to come, the central bank and the government also made clear they saw no need for any further policy easing to help the economy recover from its slump early this year. The central bank said the time lag with which policy decisions worked their way through the economy meant that past easing would continue to support the recovery.
The government's planning agency, presenting earlier its second-quarter growth estimates, also said it believed the central bank has already done enough to stimulate the economy. "They (the central bank) have done enough. I think it's now time for the fiscal spending to kick in," said Dennis Arroyo, head of policy planning at the agency.
The agency estimated the economy's performance in the last quarter at between an annual contraction of 0.1 percent and 0.9 percent growth, adding a fiscal stimulus would kick in to bolster economic growth in the succeeding quarters. The government has allocated 330 billion pesos ($6.8 billion), or more than 4 percent of GDP, in fiscal stimulus programmes this year, a bulk of which has already been spent.
The central bank also said economic prospects have brightened substantially in the past weeks and cautioned it could start to tighten policy if it sees price pressures building up and growth coming in stronger than expected. The timing of such a move, though, was still largely uncertain.
"We need to take a pause precisely because the economic prospects are much stronger today compared to what we saw in the first quarter of 2009, not only here but also abroad," Guinigundo. "We will keep the accommodative stance for as long as necessary, or as long as inflation outlook and inflation expectations continue to be favourable."
He also said that the risks between growth and inflation were "fairly balanced". Inflation is expected to gain speed in the fourth quarter as consumers shop ahead of the Christmas holidays and politicians start spending ahead of next year's national elections. "We expect inflation to start picking up in the last quarter of this year," said Ravelas.