Philippine central bank holds reverse repo rate at 3.0%

BSP also raised its inflation expectations for 2017 and 2018.

The Bangko Sentral ng Pilipinas (BSP) kept its policy rate (the reverse repo rate) on hold at 3.00%, in addition to the interest-rate corridor and RRR.

According to HSBC Global Research, the decision comes after headline inflation moderated to 2.8% y-o-y in July, below the BSP's 2-4% target mid-point.

As a result, the BSP revised its CPI forecast for 2017 and 2018. The bank raised forecasts from 3.1% to 3.2% for 2017 and from 3.0% to 3.2% for 2018. The BSP also forecasts 2019 inflation to hit 3.1%

Here's more from HSBC:

Meanwhile, June exports and imports came in significantly lower than expectations, with exports growing just 0.8% y-o-y (consensus: 14.3%) and imports falling -2.5% y-o-y (consensus: 11.6%). The drag in exports was primarily driven by lower electronics shipments, while we believe that the decline in imports was due to base effects, as imports surged in 2016 due in large part to the government’s infrastructure push.

The BSP's statement that liquidity "remains ample" could be seen as a signal that it does not plan to cut RRR soon. However, we believe that it will cut will cut RRR by 100bps in 2H once the inflation trajectory is on a firmer descending path in order to complete the bank's transition to the Interest Rate Corridor. The LDR has now crept steadily higher to 70% and the BSP should remain willing to cut the LDR to prevent possible liquidity constraints, as long as inflation remains benign and near the midpoint of the BSP's target range.

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