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Philippines: Monetary Board to study Train impact
“Significant developments” will be on the agenda when monetary authorities meet to discuss policy next week, the chief of the Bangko Sentral ng Pilipinas (BSP) said on Thursday.
Inflation will be a primary consideration along with the first round price impact of the recently-implemented Tax Reform for Acceleration and Inclusion (Train) law, central bank Governor Nestor Espenilla Jr. told reporters.
“There’s been a lot of significant developments since the December policy review that we need to consider in the coming February review,” he said.
The central bank’s policy-making Monetary Board will hold its first meeting for 2018 on February 8.
Relevant data has been updated and monetary authorities are also evaluating various price surveys to gain insights on the likely inflation path, Espenilla said, even as the initial impact from Train and other factors such as oil prices has been evolving more or less as expected.
“We continue to see the upward inflationary effects as transitory. However, we are carefully assessing next round effects and how inflation expectations could be affected,” he said.
While the Finance department expects inflation to have stayed unchanged at 3.3 percent last month, the BSP has forecast a rise to 3.4-4.0 percent due to Train-related price increases.
Monetary authorities expect average inflation to hit 3.4 percent this year, rising from last year’s 3.2 percent but still within the 2.0-4.0 target for 2018.
RRR not part of policy stance
Espenilla, meanwhile, also clarified that the Bangko Sentral’s goal of reducing bank reserve requirements should not be viewed as part of the monetary policy stance.
He said the BSP wanted to ease its reliance on the reserve requirement ratio (RRR), which is the amount that banks have maintain with the central bank in the form of cash and other liquid assets.
At 20 percent since May 2014, it is currently deemed as one of the highest in the region.
“We have heavily relied on it for a long time to run effective monetary policy in a situation of underdeveloped banking and financial markets and limited CB OMO (central bank open market operations) tools. This is no longer the case for the Philippines,” Espenilla said.
The Bangko Sentral governor said this heavy reliance on RRR had become burdensome and led to distortions in the financial system.
With the shift to the interest rate corridor in 2016, Espenilla said the central bank was now able to effectively manage liquidity in a more market-friendly manner.
“This is the logic behind the plan to gradually phase down RRR to single digit levels comparable to those prevailing in Asean (Association of Southeast Asian Nations) countries of more or less similar development,” he said.
He stressed that the forthcoming RRR reductions should not be viewed as a change in the monetary policy stance but instead as part of ongoing financial market reforms.
“High RRR policy belongs to the same regime as extensive quantitative FX (foreign exchange) controls that we are also easing. This is more compatible with our more sophisticated financial system and much stronger economy today,” Espenilla said.
Shifts in the BSP’s monetary policy stance will primarily be signaled through key interest rates in order to achieve 2.0-4.0 percent inflation target.
“Peso is just fine”
With regard to peso, the Bangko Sentral chief said that latest exchange rate adjustments were in line with expectations.
“The peso is just fine. Demonstrating flexibility, reflecting day-to-day market conditions,” he said.
While there will be volatility, runs and corrections, Espenilla stressed that a peso meltdown was unlikely given the underlying economic fundamentals.
The currency closed at P51.58 against the dollar on Thursday, down from P51.295 the previous day.
Lastly, Espenilla noted that the balance of payments (BoP) deficit was very manageable and was but a reflection of a rapidly-growing economy.
The Philippine, he said, is not headed for a foreign exchange crisis given its large gross international reserves (GIR) and investment grade ratings.
The BoP remained in deficit last year at $863 billion, more than double the 2016 shortfall of $420 billion. It was, however, lower than Bangko Sentral’s $1.4-billion forecast.
Source: http://www.manilatimes.net/monetary-board-study-train-impact/377669/