MANILA, Philippines – Policy rates were kept steady on Thursday by the Bangko Sentral ng Pilipinas (BSP) which said the economy remains in good footing despite the recent slump in the financial markets that highlighted funds leaving emerging markets.
Key rates— which serve as banks’ benchmark on charging their loans— were maintained at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending. Rates have been at that level since October last year.
At the same time, the BSP’s policymaking Monetary Board also retained the rate on special deposit accounts (SDA)— fixed-term deposits of banks and trust departments— at two percent, halting a series of cuts this year that started in January, March and April.
“The Monetary Board’s decision is based on its assessment that the inflation environment remains benign,” BSP Governor Amando Tetangco, Jr. told reporters in a briefing.
“At the same time, domestic economic growth remains firm, driven by strong internal demand. Ample liquidity and strong bank lending should also continue to support economic activity,” he added.
Inflation may settle at 3.1 percent this year, slower than the 3.2 percent projected by the central bank last April. For 2014, consumer prices may accelerate 3.6 percent, up from 3.4 percent originally.
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The forecasts fell at the low-end of the BSP’s 3- to 5-percent target range for both years.
BSP Deputy Governor Diwa Guinigundo, in the same briefing, said lower oil prices in the world market are expected this year to push down domestic prices. As of May, inflation has settled at 3 percent.
Liquidity flushing out of the system from the SDA, meanwhile, could drive inflation higher next year. As of May, SDA deposits totaled P1.88 trillion, already down from a high of P1.98 trillion a month ago.
Before Thursday’s policy meeting, the BSP has cut SDA rates by a total of 150 basis points in a bid to encourage more bank lending, support growth and deepen the capital markets.
“Keeping policy setting steady also allows time to assess the impact of recent fine-tuning in monetary operations,” Tetangco said.
Recent global financial market developments also support an unchanged policy,” Tetangco said.
Financial markets have been rattled by the possibility the United States Federal Reserve will soon scale down its $85-billion monthly bond purchases as the world superpower shows signs of recovery.
Local stocks plummeted by 6.75 percent on Thursday, while the peso ended at 43.10 versus the dollar.
“I think there are built in elements in the Philippine macroeconomy to prevent what you described as a massive selloff,” Guinigundo said.
“We are confident that the US will go for an orderly withdrawal of stimulus in the US economy,” he added.
Tetangco, for his part, said the BSP will remain watchful of developments to ensure movements in the peso-dollar exchange rate “are not excessive” and remain “consistent with over-all price and financial stability objective.”