Higher inflation prompts BSP to hike interest rates

THE Bangko Sentral on Thursday raised two benchmark interest rates by 25 basis points after the government reported that inflation had spiked by 4.5 percent in April.

The bank’s seven-member Monetary Board increased the overnight borrowing rate to 4.5 percent from 4.25 percent previously, and the overnight lending rate to 6.5 percent from 6.25 percent, following a similar 25-basis-point hike in March.

“In deciding to increase policy rates anew, the Monetary Board noted that the latest baseline inflation forecasts continue to suggest that the 3-to-5 percent inflation target for 2011 remains at risk, mainly as a result of expected pressures from oil prices,” Bangko Sentral Governor Amando Tetangco Jr. said

Deputy Governor Diwa Guinigundo said that if the interest rate was not adjusted, not only would the Bangko Sentral fall behind the curve; the inflation rate for 2011 might hit an average of 5.6 percent, beyond the bank’s target.

Tetangco said sustained price pressures and higher inflationary expectations could influence future wage and price outcomes.

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

Despite the rate increase, the economy is expected to keep growing this year.

“The 50-basis point increase can be very well accommodated by the economy,” Guinigundo said.

Last month’s inflation, which tracks the changes in the prices of goods and services, was the same as the 4.5 percent recorded in April last year, but higher than March’s 4.3 percent.

The National Statistics Office said the latest figure would bring year-to-date inflation to 4.2 percent. Excluding volatile food and fuel items, core inflation inched higher to 3.8 percent in April from 3.5 percent in March.

“We continue to expect headline inflation to average 4.8 percent in 2011, above the Bangko Sentral’s projection of 4.4 percent and just shy of the top end of the 3- to 5-percent target band,” said Barclays Capital in Singapore.

“Our sense is the headline inflation would exceed 5 percent by June. Given this backdrop and rising inflation expectations, our base case remains that the central bank would hike the policy rate by 25 basis points this month and by a further 25-basis point in July, with an end-of- year rate of 4.75 percent.”

The National Statistics Office said the annual inflation in Metro Manila went up to 4.2 percent in April from 4 percent in March. Annual growths were higher in all the commodity groups except in the food, beverage, tobacco and clothing indexes.

Inflation was even higher at 4.6 percent in April from 4.5 percent in March outside Metro Manila.

“This was triggered by the double-digit growth in the fuel, light and water index in the National Capital Region brought about by the increased charges in electricity rates in the area,” the National Statistics Office said.

“Higher monthly rates in electricity along with the upward price adjustments in kerosene in many regions also contributed to the uptrend.” –Roderick T. dela Cruz and Elaine R. Alanguilan, Manila Standard Today