MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) may need to exercise tightening measures next quarter, given excess liquidity in the financial system, and the threat of higher inflation amid an improving global economy, Sterling Bank of Asia said.

In an economic briefing held Wednesday, Sterling Bank Executive Vice President and Treasurer Roland Avante said a 25-basis point hike in the benchmark overnight borrowing rate was also in order within the last quarter of the year.

"The cue is the inflation numbers. If inflation goes above 5%, that would be a cause of concern,” he stressed.

Avante said factors like the El Nino phenomenon and higher oil prices overseas were threatening to bring inflation beyond 5%, a figure he described as excessive.

"When oil prices move up, there is only a lag time of two months before this hits actual prices, and coupled with the El Nino, we will definitely see inflation creeping up," he explained.

Avante added that liquidity in the financial system was already reaching hundreds of billions of pesos, and would have to be siphoned off soon. He said as of January this year, total Special Deposit Accounts, short-term placements offered by the BSP to local banks, already hit P692.2 billion, an in increase of about P148 billion from the previous month.

But he noted the BSP may first employ other tightening measures, such as raising reserve requirements, to avoid increasing key policy rates too early. Increasing reserve requirements is seen as a cheaper way to siphon off the excess money supply in the system.

“Moving up reserve requirements does not have too much of an impact on the market because it's not so much availed as the other instruments,” Avante pointed out.

The BSP will hold its regular policy-setting meeting on Thursday. It is expected to keep interest rates steady despite an uptick in core inflation last month.