Bangko Sentral raises policy rates 25 basis points as response to inflation

(Updated 5:36 p.m.) Bangko Sentral ng Pilipinas raised its policy rates by 25 basis points or 0.25 percent from record lows during the Monetary Board meeting Thursday, citing the "decision is a preemptive response to signs of inflation pressures."

 

The policy decision brought the overnight borrowing rate to 3.75 percent and the overnight lending rate to 5.75 percent, Bangko Sentral Governor Amando Tetangco Jr. told reporters in a briefing after the policy-making body had met at the central bank.

 

The rates on term reverse repurchase and repurchase deals were also raised accordingly, while the yield on special deposit accounts was left unchanged at 2.25 percent. Tetangco said.

 

The reserve requirement for thrift banks was left unchanged at 8 percent, as well as for universal and commercial banks at 20 percent. 

 

Yields of its special deposit accounts (SDA) facility steady at 2.25 percent at all tenors.

 

Tetangco said the Monetary Board decision is a preemptive response to signs of inflation pressures and inflation expectations which are expected to settle at the upper end of the government target of 3 to 5 percent for the year.

 

"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 3±1 percent for 2015," he said.

 

Upside risks to inflation will come from higher food prices, short-term volatility in international oil prices, and pending petitions for adjustments in power rates and transport fares.

 

"Given these conditions, the Monetary Board believes that an increase in the BSP's policy rates will moderate inflation pressures and arrest potential second-round effects by helping anchor inflation expectations," Tetangco said.

 

The Monetary Board also sees the increase in policy rates as a preemptive measure in the context of the eventual normalization of monetary policy in some advanced economies, the central bank chief added.

 

In a phone interview, Security Bank Corp. economist Patrick Ella said the BSP's decision is a move seen to address short-term inflation pressures.

 

"Definitely they should move now because if they would have an emergency meeting later in the year, they would send the wrong signal," he said.

 

Bangko Sentral forecast inflation to settle at 4.33 percent for 2014, and at 3.72 percent for 2015 and 2.8 percent for 2016, Deputy Governor Diwa Guinigundo said in the same briefing.

 

"In those forecasts, we considered the latest developments in the market including the impact of El Niño, the potential increase in rice prices, the change in the implementation date of LRT and MRT fares, and power rate adjustments," he said.

 

Domestic liquidity or M3 expanded at a slower pace of 23 percent to P7.1 trillion in June from a 28.4 percent in May, latest central bank data showed. 

 

M3 – the broadest measure of money – includes currencies in circulation, bank deposits, and money market funds among other highly liquid assets. 

 

Inflation slightly eased in June to 4.4 percent in June from 4.5 percent in May, bringing the year-to-date average to 4.2 percent, at the upper end of the government target.

 

The favorable outlook for domestic demand gives the BSP some scope for a measured adjustment in policy rates without hurting the economy, Tetangco said.

 

"Going forward, the BSP will remain vigilant against risks to price and financial stability and stands ready to undertake further policy actions as necessary," he said. – VS, GMA News