Lower Philippine inflation forecast may give central bank more room to hold

The Philippine central bank on Thursday left key interest rates unchanged and cut its forecast for inflation this year, a move likely to reduce expectations for at least one rate hike in the second half. The central bank, which has repeatedly said its policy actions would be guided by the inflation outlook, left its overnight borrowing rate on hold at 3.0 percent, as predicted by all 12 economists in a Reuters poll.
Forecast "indicate a lower path of future inflation," central bank governor Amando Tetangco told reporters after his last policy meeting. He will hand reins of the Bangko Sentral ng Pilipinas (BSP) to his successor, deputy governor Nestor Espenilla, on July 3, after the maximum-allowed 12 years in office.
The central bank lowered its average inflation forecast to 3.1 percent in 2017, from 3.4 percent while keeping the 2018 forecast at 3.0 percent. While there may be a temporary impact on inflation from the government's proposed measures to raise more taxes, Tetangco said, it should be mitigated by social safety nets. The annual inflation rate in one of Asia's fastest-growing economies eased to a four-month low in May. Yet with the 3.1 percent average in the first five months above the midpoint of the central bank's 2-4 percent 2017 target range, some economists have predicted rate hikes in the second half.
ONE HIKE, NOT TWO But hours ahead of Thursday's rate hold, ING said it now expects only one 25 basis point hike later this year, rather than two. After the BSP decision, Capital Economics repeated its forecast for no change this year, saying the outlook for inflation "doesn't warrant tighter policy."
ANZ, which has predicted two hikes before year-end, said it will be "revisiting" that in view of lower oil prices and May's softer-than-expected inflation. Policymakers have left the stance of monetary policy unchanged since they raised rates by 25 basis points in September 2014.
Deputy Governor Diwa Guinigundo said he expects the economy to sustain its strong growth momentum despite "some impact on growth and inflation" from the ongoing conflict in a town in the southern Philippines. The economy's 6.4 percent annual growth in the first quarter marked 73 quarters of uninterrupted growth. Growth is expected at between 6.5 percent and 7.5 percent this year and 7.0-8.0 percent from 2018 to 2022. The BSP's first policy meeting under Espenilla will be on August 10.