BSP raises key interest rates

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The Monetary Board raised its two key interest rates by 25 basis points each at its policy meeting on Thursday, effective immediately, but maintained its rates on other instruments.

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The new rate for overnight borrowing now stands at 3.75 percent, up from 3.5 percent, and that of the overnight lending is now at 5.75 percent, up from 5.5 percent previously, the Bangko Sentral ng Pilipinas (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.

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