BSP hikes key rates by 25 bps

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) raised yesterday its key policy rates by 25 basis points after keeping them at record lows for 20 months to rein in inflation expectations amid escalating global oil and food prices due to tensions in the Middle East and North African (MENA) states as well as the disaster in Japan.

BSP Governor Amando M. Tetangco Jr. said in a press conference that the Monetary Board decided to raise its overnight borrowing rate to 4.25 percent from the record low four percent and its ovenight lending rate to 6.25 percent from six percent due to the continued build up of inflation pressures.

“The Monetary Board’s decision was based on signs of stronger and broadening inflation pressures as well as a further shift in the balance of inflation risks,” Tetangco stressed.

He pointed out that the country’s headline and core inflation have started to rise as international food and oil prices continued to escalate due to the combination of sustained strong global demand and supply disruptions.

Likewise, he added that the interest rates on term reverse repurchase and repurchase facilities as well as special deposit accounts (SDAs) were also raised.

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. The central bank managed to keep interest rates steady for 14 straight policy rate-setting meetings since July 2009 due to benign inflation outlook.

However, Tetangco said the BSP’s latest inflation forecast now indicate that the target of three percent to five percent this year is now at risk. Inflation kicked up to a nine-month high of 4.3 percent in February from 3.6 percent in January, bringing the average inflation in the first two months of the year to 3.9 percent from 4.2 percent in the same period last year.

“Given these developments, the Monetary Board decided to act promptly to rein in inflation expectations. The Monetary Board believes that a preemptive response will minimize the overall impact of rising inflation on domestic economic activity by helping to firmly anchor the public’s inflation expectations,” the BSP chief stressed.

According to him, well-anchored inflation expectations would safeguard price stability and would preserve the public’s purchasing power.

He added that the country’s resilient economy could absorb a 25-basis point rise in interest rates.

“Buoyant domestic demand conditions provide room for a policy interest rate hike without affecting the country’s economic growth prospects,” Tetangco said.

BSP Deputy Governor Diwa Guinigundo said the rate hike helped kept the central bank’s inflation forecast this year within the three-percent to five-percent target but higher than the previous forecast of 4.4 percent set last Feb. 10.

Guinigundo pointed out that the forecast could have been raised to 5.18 percent if the policy rates were left unchanged and assuming that inflation averaged 4.24 percent for March.

He explained that monetary authorities now assume oil price to average between $100 per barrel and $110 per barrel instead of the previous assumption of $85 per barrel to $95 per barrel due to the tensions in MENA states.

Higher oil prices, he said, would result in second round effects due to clamor for higher wages and petitions for transport fare increases.

“The BSP does not respond to supply shocks but if the effects are prolonged we have to act decisively. This policy move is a preemptive move so that inflation will be well anchored,” Guinigundo said .

For 2012, he said monetary authorities lowered its inflation forecast to 3.4 percent instead of 3.5 percent. The BSP has set an inflation target of three percent to five percent between 2011 and 2014.

He reiterated that monetary authorities believe that the tigthening act would not affect the growth prospects of the Philippines. –Lawrence Agcaoili (The Philippine Star)