More Dovish Statement by Bangko Sentral ng Pilipinas

October 20, 2011

The central bank in The Philippines left its key overnight borrowing rate at 4.5% and overnight lending rate at 6.5%.  Reserve requirements were kept at current levels as well.  A progressive and considerable shift from hawkish toward dovish thinking has occurred since back-to-back interest rate hikes of 25 basis points apiece on March 24 and May 5.  At that time, Bangko Sentral ng Pilipinas became one of the last Asian central banks to tighten, and the rate increases were called “preemptive” steps in the face of upwardly tilted inflation risks including brisk domestic credit expansion.  While the key rates were not increased further at the subsequent meetings on June 16 and July 28, the Monetary Board authorized increased reserve requirements of a full percentage point at each of those sessions.  Price risks were still a clear concern at the June meeting, and while officials felt such were “lessening” by the time they met in July, they still deemed such to be upwardly tilting.  At a meeting on September 8, officials took no further policy-tightening actions, projected in-target (3-5%) inflation through 2013, called expected inflation firmly anchored, and observed slower export demand and public spending.  Calling policy settings appropriate, officials concluded in September that “a pause in the policy stance allows for careful assessment of inflation risks amid signs of sluggish global economic growth. The Monetary Board believes that the current monetary policy stance remains in line with the need to safeguard price stability and support sustained economic growth.”  However, they noted that fast credit expansion still posed price risks that needed careful watching.

Today’s statement also left both rates and reserve requirements as they were but took the additional dovish step of changing the direction of risk: “The Monetary Board also believes that the risks surrounding the inflation outlook over the policy horizon are slightly tilted to the downside.”  Calling economic conditions “subdued,” expected inflation “well-contained,” domestic public spending “weaker than expected,” and the overall inflation outlook “manageable,” officials pledge to monitor “evolving price and output conditions, both on the global and domestic fronts, and will ensure that monetary policy settings remain appropriate.”  In short, the direction of the next rate change is ambiguous.  Two-sided policy risk has returned.

From December 2008 to July 2009, the Monetary Board cut interest rates six times by a total of 200 basis points, of which only a quarter was reversed so far.  The final policy meeting of 2011 is set for December 1.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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