Real interest rate narrows

The narrowing real interest rate in the first two months of 2011 is now worrying the Bangko Sentral, which said it will definitely review its policy stance in its next meeting on March 24.

Real interest rate, or the difference between the Bangko Sentral’s overnight borrowing rate and the inflation rate, slid to the negative territory in February. The borrowing rate stood at 4.0 percent while inflation rate hit 4.3 percent.

However, Bangko Sentral Deputy Governor Diwa Guinigundo said the average real interest rate remained positive in the first two months, when inflation rate averaged 3.9 percent.

“It is still positive but is the difference sufficient to maintain macro-stability? This is something that we will be addressing in the March 24 Monetary Board meeting, the issue of real interest rates,” said Guinigundo.

Guinigundo earlier said it was important that real interest rate remained positive to encourage saving among the public. A negative real interest rate would encourage expenditures, which is inflationary in nature, he added.

He said the Monetary Board would also consider “the issue of inflation expectations in the face of constant increases in oil prices and commodity prices.”

“Inflation expectations might be adversely affected in the process and therefore the monetary policy will really have to be reviewed in the light of all these increases in commodity prices,” he said.

Guinigundo said adjusting the policy rates was one option open to the Monetary Board.

The International Monetary Fund and several foreign banks said the Bangko Sentral should consider raising its interest rates, in the wake of rising commodity prices.

Barclays Capital raised its 2011 inflation outlook in the Philippines to 4.8 percent from the previous estimate of 4.0 percent, following the series of oil price hikes in the world market.

Hongkong and Shanghai Banking Corp. said with inflation rate hitting 4.3 percent in February, “Bangko Sentral looks set to hike its policy rate by 25 basis points at the March 24 meeting.”

“We expect inflation to breach the central bank’s target band of 3 to 5 percent as early as the second quarter amid surging global oil and food prices,” HSBC said.

“Thus, the Bangko Sentral is likely to take a more aggressive stance and we raise our policy rate forecast from 4.5 percent to 5 percent for end-2011.” –Roderick T. dela Cruz, Manila Standard Today