Bangko Sentral raises policy rates by 25 basis points to manage inflation risks

By DANESSA O. RIVERA, GMA News

Published September 11, 2014 4:24pm

(Updated 6:41 p.m.) Bangko Sentral ng Pilipinas on Thursday raised the interest yield on policy rates – as well as special deposit accounts (SDAs) – by another 25 basis points during the Monetary Board meeting Thursday, to manage inflation risks for this year and next.

The Monetary Board – Bangko Sentral's policy-setting body, increased the overnight borrowing rate to 4 percent and to 6 percent percent for overnight lending, BSP Deputy Governor Diwa Guinigundo told reporters during a briefing after the policy meeting.

This is the second time this year that Bangko Sentral tweaked its policy rates since July when the overnight borrowing and lending rates were increased by 25 basis points from record lows since October 2012.

The yields on SDAs was also raised to 2.5 percent for all tenors, the deputy governor said.

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

"The Monetary Board deemed it necessary to respond with stronger policy action to rein in inflation expectations further and preempt potential second-round effects even as previous monetary responses continue to work their way through the economy," Guinigundo said.

Bangko Sentral forecast inflation to settle at 4.5 percent for 2014, and at 3.8 percent for 2015 and 3 percent for 2016, he noted.

Price pressures

Price pressures emanate from the possible increases in food prices as a result of tight supply conditions, while petitions for adjustments in utility rates and potential power shortages are being studied, the deputy governor said.

Last month, inflation accelerated by 4.9 percent, the same rate in July but faster than the 2.1 percent a year earlier.

The decision to raise SDA rates will mop up excess liquidity in the financial system, Guinigundo said.

"We continue to see above-trend credit growth. We expect that with policy measures we have undertaken in the past, we will be seeing moderation in credit growth moving forward," he said.

In July, money circulating in the financial system grew by 18.3 percent to P7.1 trillion – above the 15 to 18 percent growth target but slower than the revised 23.3 percent recorded in June.

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

'BSP can only do so much'

This may be the last intance the BSP raises policy rates this year, Bank of the Philippine Islands economist Nicholas Mapa told GMA News Online.

"Since the inflation pressures are coming from supply side factors, the BSP got a hold of inflation pressures and can only do so much," he said.

"Government should step up in controlling price pressures in food and utilities," the economist added.

The latest policy tweaks will "drive interest rates higher and will make it harder to take out loans from banks," Mapa noted.

While the rate hike will be negative for some activity in the market, the economy is still strong enough to withstand the tighter policy, Mapa said.

In the second quarter, the Philippine economy expanded by 6.4 percent, matching that of Malaysia as the second fastest in Asia next to China, from 5.6 percent in the first quarter and 7.9 percent a year earlier.

– VS, GMA News

Tags: interestrates, monetaryboardpolicyrates, bangkosentralpolicymeeting, bangkosentralpolicyrates, sdarates