BSP raises key interest rates

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Borrowing, lending rates up 25 basis points

THE Monetary Board of the Bangko Sentral ng Pilipinas (BSP) raised its benchmark   interest rates by 25 basis points each at its policy meeting on Thursday, effective immediately, but maintained its rates on
other instruments.

The new rate for overnight borrowing, or reverse repurchase (RRP) facility, now stands at 3.75 percent, up from 3.5 percent. That for overnight lending, or repurchase facility (RP), is now at 5.75 percent, up from 5.5 percent previously, BSP told reporters right after the Board meeting.

The BSP had kept the rates steady since October 2012.


The rate on special deposit accounts (SDA) was left unchanged at 2.25 percent, while the reserve requirement ratio (RRR) for banks also remained unchanged at 20 percent.

Explaining the central bank’s latest move, BSP Governor Amando Tetangco Jr. told reporters in a press briefing that the Monetary Board’s decision to adjust the key policy rates is a preemptive response to signs of inflation pressures and elevated inflation expectations.

The 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 2 percent to 4 percent for 2015, Tetangco said.

“At the same time, the balance of risks to the inflation outlook continues to be tilted toward the upside, with price pressures emanating from higher food prices, short-term volatility in international oil prices, and pending petitions for adjustments in power rates and transport fares,” he said.

Tetangco said while inflation expectations remain within target, they are seen settling toward the upper end of the inflation target range, particularly for 2015.

“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,” he said.

“Given these considerations, 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,” he added.

For this year then, the central bank revised downward its inflation forecast to 4.3 percent from the previous projection of 4.4 percent.

For 2015, it adjusted the inflation forecast to 3.7 percent from 3.6 percent. The BSP also provided its full-year forecast for 2016 inflation at 2.8 percent.

Tetangco added that the continued favorable outlook for domestic demand allows some scope for a measured adjustment in policy rates without adversely affecting the country’s economic growth prospects.

“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 added.

To moderate inflation pressures – analysts
According to The Manila Times analysts who correctly predicted the hike in the main policy rates, the central bank’s decision should help to moderate inflation pressures.

“We believe Thursday’s rate hike is a commendable follow-through, pre-emptive action meant to ensure that inflationary expectations for 2015 are kept well anchored as the move improves the chances of meeting its [BSP’s] lower 2 percent to 4 percent target,” said Emilio Neri Jr., lead economist at the Bank of the Philippine Islands (BPI).

Neri said the central bank’s decision to hike the overnight borrowing or RRP rate also “demonstrated that the below-consensus GDP growth print for the first quarter of 2014 and the threat of a sustained slowdown throughout the rest of 2014 were not going to get in the way of carrying out the monetary authorities’ price stability mandate.”

Another BPI economist, Nicholas Antonio Mapa, said the BSP’s move helps anchor inflation expectations and will facilitate the central bank carrying out its price stability mandate.

“With price pressures building over the past few months, there were signs of second-round effects emanating from this prolonged inflation prints above the 4 percent handle.  This has been seen in transport fare adjustments, as well as tuition increases, which may continue if inflation sustains its upward trend,” he said.

Jeff Ng, economist at the Standard Chartered Bank, also said the rate hike should help to anchor inflationary expectations and moderate inflation pressures.

“Inflation has surged recently. If it continues the momentum seen in the past three months, it will overshoot the inflation target next year. We see inflationary pressures coming down in the coming months as food imports come in, but in the short term inflation is likely to stay elevated from depletion in rice stocks and the disruptive effects of the typhoon,” he said, referring to the last typhoon that hit the country, Glenda.

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