BSP raises policy rate for 1st time in 3 years

Posted at 07/31/2014 4:24 PM | Updated as of 07/31/2014 5:23 PM

BSP says 2014, 2015 inflation forecasts at risk

MANILA (2ND UPDATE) -- The Philippine central bank raised its main interest rate on Thursday for the first time in three years to tame price pressures and left the door open for further tightening, saying its inflation targets for this year and next were "at risk".

The rate increase was its fourth and most aggressive tightening move in as many meetings. All 12 analysts in a Reuters poll had expected the central bank to tighten monetary policy but only half had expected the main policy rate to go up.

"The BSP (Bangko Sentral ng Pilipinas) wants to ensure that inflationary expectations for 2015 are well anchored. If they had not adjusted rates today, markets and the business community would be concerned that they might end up falling behind the curve," said Emilio Neri, an economist at the Bank of the Philippine Islands.

He said another increase was likely at the next meeting in September.

The policy-making Monetary Board raised the overnight borrowing rate by 25 basis points to 3.75 percent after keeping it on hold since December 2012. It held the rate on its special deposit accounts (SDAs) at 2.25 percent.

"The Monetary Board's decision is a pre-emptive response to signs of inflation pressures and elevated inflation expectations," Governor Amando Tetangco said in a statement.

"Latest baseline forecasts indicate that the inflation target could be at risk, as the forecasts have shifted closer toward the higher end of the target range of plus or minus 3 percent for 2015," he said.

The rate rise should help anchor price expectations, he added.

The central bank now expects average 2014 inflation of 4.33 percent against 4.4 percent previously, and 3.72 percent in 2015 versus 3.7 percent, Diwa Guinigundo, central bank deputy governor, told reporters.

Price pressures were coming from higher food prices, short-term volatility in global oil costs and pending increases in power rates and transport fares, the central bank said.

Six out of the 12 economists in the Reuters poll had expected an increase in the main overnight policy rate. The other six had expected no change in that rate but a rise in the SDA rate, which was left unchanged.

Growth may be lacklustre in the second quarter due to slower public spending, but strong domestic consumption, exports and rising private investment should continue to support economic activity.

IMF CUTS FORECAST

On Friday, the International Monetary Fund cut its growth forecast for the Philippines this year to 6.2 percent from the 6.5 percent seen in March because of weakness in the first quarter and slower public spending.

Tetangco said on Wednesday inflation would probably be between 4.1 and 4.9 percent in July, pushing up against the top end of the central bank's 3 to 5 percent target range for this year. It has a target of 2 to 4 percent for 2015.

Inflation averaged 4.2 percent in the first half, up from 3 percent for the whole of 2013, due largely to higher prices for food, including rice, as well as for transport and power, caused by a series of strong typhoons and higher global oil prices.

Prices of food and non-alcoholic drinks rose 7.4 percent in June from a year earlier, the biggest increase since April 2009. Food prices alone also saw their biggest rise in more than five years at 7.8 percent. Food accounts for 39 percent of the consumer price basket.

On Monday, President Benigno Aquino authorised the state grains agency to import an additional 500,000 tonnes of rice for emergency needs to help bring down record-high prices of the national staple.

The central bank has already taken several modest steps this year to tighten liquidity and hold down price pressures, raising the rate on the SDAs by 25 basis points at its last meeting in June to 2.25 percent and raising banks' reserve requirements in May and March.

The SDAs are a facility where banks can park funds for between seven and 32 days. Raising the rate could make it more attractive for banks to leave money there, thus draining liquidity from the system.

The increase in the main overnight borrowing rate made the Philippines the second Southeast Asian country to lift borrowing costs this month to curb price pressures. Malaysia raised rates on July 10.