BSP hikes interest rates by 25 basis points

Bangko Sentral ng Pilipinas (BSP) yesterday raised interest rates by 25 basis points to control inflation expectations and contain second round effects after inflation rose to a one-year high of 4.5 percent in April because of surging oil prices.

The Monetary Board raised the central bank’s overnight borrowing rate to 4.50 percent from 4.25 percent and its overnight lending rate to 6.50 percent from 6.25 percent.

Central banks usually raise interest rates to curb aggregate demand, causing inflation to slow down. This means that it is now more costly to borrow money.

“International oil prices have remained elevated due to strong global demand as well as concerns about supply gaps. Global non-oil markets also continued to tighten,” BSP governor Armando Tetangco Jr. said in a press briefing.

He said the latest baseline inflation forecast suggests that the inflation target of 3.0 percent to 5.0 percent set by the BSP for this year remains at risk because of rising oil prices.

Inflation shot up to a one-year high of 4.5 percent in April from 4.3 percent in March, bringing the average inflation in the first four months of the year to 4.2 percent from 4.3 percent in the same period last year.

Tetangco said surveys conducted by private economists and consensus from Asia Pacific show elevated inflation forecasts for 2011 and still higher inflation for 2012.

Sustained expectations of higher inflation could influence wages and prices in the future.

“With these considerations, the Board deemed it prudent to rein in inflation expectations further and contain second round effects with a follow-through policy action,” Tetangco said.

BSP deputy governor Diwa Gunigundo said inflation expectations for 2011 would have gone up to 5.6 percent and expectation for 2012 would have increased to 4.2 percent had monetary authorities retained interest rates.

With the rate hike, Gunigundo said inflation expectations for 2011 and 2012 are now back within the target of 3.0 percent to 5.0 percent set for 2011 until 2014.

He said the rate hike of 50 basis points would not affect economic growth.

Last March 24, the Monetary Board raised interest rates by 25 basis points to control inflation expectations amid rising oil and food prices. This brought the overnight borrowing rate to 4.25 percent from a record low of 4.0 percent and the overnight lending rate to 6.25 percent from 6.0 percent.

Prior to the rate hike last March, the central bank managed to keep interest rates steady for 20 straight months since July 2009 because of a benign inflation outlook.

The BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 to cushion the impact of the global financial crisis on the domestic economy.

Tetangco said the monetary board noted that the economy is expected to grow above trend as capacity utilization of the manufacturing sector has remained consistently above 80 percent while lending for production activities continues to expand, indicating the sustained pick-up in private investment.

“Consumer lending has remained robust while vehicle sales were sustained despite rising fuel cost,” he said.

He said the Monetary Boad is prepared to take appropriate actions to ensure price stability.

Tetangco said sustained foreign capital inflows should be carefully monitored so it does not exacerbate domestic liquidity levels and cause inflation pressure.

He explained that domestic liquidity and credit continue to grow at a reasonable pace.

Economic managers see the country’s gross domestic product (GDP) growing between 7.0 percent and 8.0 percent this year and next year.

The Philippines registered its strongest economic growth in 34 years after its GDP expanded by 7.3 percent last year from 1.1 percent in 2009. –Lawrence Agcaoili (The Philippine Star)