Aug 182013

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) may tweak its 2015 inflation target of two to four percent in order to keep up with a foreseen volatile interest rate environment, the Bank of the Philippine Islands said.

“In keeping with its desire to fulfill its dual mandate of price stability and financial stability, the BSP may consider widening its 2015 inflation target, a move that will be widely accepted by the market,” BPI Economics and Financial Markets Research said in a commentary.

“BSP may resort to invoking flexibility and widen its inflation target to avoid a volatile interest rate environment, a scenario which could emerge with its pre-set 2015 inflation target of two to four percent,” it said.

The bank explained the 2015 inflation target may be “incompatible” with the central bank’s preferred “middle-of-the-pack” stance for the peso.

This “middle-of-the-pack” stance, which means the BSP is keeping the peso from veering away from the movement of other regional currencies, is seen to have a pass-through impact on inflation, the bank noted.

“BSP’s more flexible exchange rate policy, embodied in their efforts to keep USD/PHP in the middle of the regional pack will likely lead to an upward adjustment in the BSP’s 2015 inflation target, which will in turn, enable monetary policy authority to keep interest rates stable in the next 18 months,” BPI said.

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The BSP sees inflation to fall within the three to five percent target this year and the next, and settle between a two to four percent range in 2015.

Inflation has so far averaged 2.9 percent in the seven months to July, giving the central bank room to adjust its policy stance if needed.

“BSP will continue to safeguard the stability of both prices and the financial sector through its deployment and calibration of macroprudential measures as we round the cape of investment grade and on to a higher growth path,” the bank said.

The BSP’s policy-making Monetary Board has kept overnight borrowing and lending rates at 3.5 percent and 5.5 percent, respectively, since the start of 2013. Its next rate-setting meeting is slated for Sept. 12.

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