2016.12.22 Monetary Policy Press Statement

Monetary Board Maintains Monetary Policy Settings

12.22.2016

At its meeting today, the Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept steady. The reserve requirement ratios were likewise left unchanged.

The Monetary Board’s decision is based on its assessment of inflation dynamics and the risks to the inflation outlook over the policy horizon. Latest baseline forecasts indicate that average inflation would likely settle below the target range of 3.0 percent ± 1 percentage point for 2016. However, inflation is seen to return gradually to a path consistent with the inflation target in 2017-2018 due to higher oil prices and strong domestic economic activity. The overall balance of risks surrounding the inflation outlook also remains tilted to the upside, owing partly to the pending petitions for adjustments in electricity rates as well as the initial impact of the government’s broad fiscal reform program. Increased uncertainty in global economic prospects, meanwhile, continues to pose a key downside risk to the inflation outlook. Nevertheless, inflation expectations remain broadly consistent with the inflation target over the policy horizon.

The Monetary Board also stressed that domestic demand conditions are likely to stay firm, supported by solid private household spending, higher government expenditure, and adequate domestic liquidity. In addition, the Monetary Board has considered the potential impact of the ongoing monetary policy adjustment in the US on global financial market conditions. The Monetary Board also noted that maintaining monetary policy settings at this juncture will give the BSP more time to assess evolving economic developments and calibrate its policy tools as appropriate.

With these considerations, the Monetary Board believes that prevailing monetary policy settings remain appropriate. Going forward, the BSP will continue to monitor emerging price and output conditions to ensure price and financial stability conducive to sustained economic growth.

Government Keeps Inflation Target for 2017 - 2018; Sets Inflation Target for 2019 - 2020

12.22.2016

In line with the inflation targeting approach to the conduct of monetary policy, the Development Budget Coordination Committee (DBCC), during its meeting on 20 December 2016, decided to keep the current inflation target at 3.0 percent ± 1.0 percentage point for 2017 – 2018 and approved the inflation target of 3.0 percent ± 1.0 percentage point for 2019– 2020. The government’s inflation target is defined in terms of the average year-on-year change in the consumer price index (CPI) over the calendar year. The multi-year target promotes a long-term view on inflation, helps anchor inflation expectations, and fosters greater predictability in economic decision-making by businesses, households, and other economic agents. The announcement of the target is in line with the BSP’s commitment to greater transparency and accountability in its conduct of monetary policy.

After settling below the target in 2015, inflation is seen to remain near the low end of the 3.0 percent ± 1.0 percentage point target range for 2016 and move towards the midpoint of the 3.0 percent ± 1.0 percentage point target band in 2017 – 2018. Structural changes in inflation dynamics alongside improvements in the economy’s productive capacity have been supporting a low and stable inflation environment that is consistent with the healthy pace of economic growth.

Looking ahead, robust domestic demand and sustained improvement in productive capacity following the government’s thrust towards higher government spending and tax reforms underpin the assessment of manageable inflation outlook over the medium term. Moreover, the BSP’s strong commitment to price stability has kept inflation expectations well anchored to the target over the policy horizon. The BSP will continue to monitor price developments to ensure that the monetary stance remains appropriate in keeping inflation within target.