UPDATE: BSP raises policy rates, SDA by 25 bps

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(Adding details and comments from the central bank, analyst)

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) in a widely expected move raised its benchmark interest rates and Special Deposit Accounts (SDA) by 25 basis points each during its meeting on Thursday to rein in inflation.

The interest rate hikes follow a similar action taken by the Monetary Board in its July 31 meeting.

The rate for the overnight borrowing, or reverse repurchase (RRP) facility now stands at 4.0 percent, up from 3.75 percent, and the rate for overnight lending, or repurchase facility, has been raised from 5.75 percent to 6.0 percent.


Similarly, it hiked the interest rate paid on special deposit accounts to 2.5 percent from 2.25 percent.

Preempting inflation pressures
Explaining the central bank’s latest move, Guinigundo 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 Monetary Board’s decision is based on the assessment that the inflation target, particularly for 2015, remains at risk. [The] latest baseline forecast has shifted closer toward the higher end of the target range of [2 percent to 4 percent] for 2015, indicating elevated inflation pressures,” BSP Officer-in-Charge Diwa C. Guinigundo said.

“Moreover, inflation expectations are seen settling toward the upper end of the inflation target range, particularly for 2015.

“At the same time, the balance of risks to the inflation outlook continues to lean toward the upside, with pressures emanating from the possible further increases in food prices as a result of tight domestic supply conditions, as well as from pending petitions for adjustments in utility rates and potential power shortages.

“Given these considerations, The Monetary Board deemed it necessary to respond with strong 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. The Monetary Board believes that the continued favorable prospects for domestic demand—as evidenced by stronger GDP growth in the second quarter—allow some scope for further adjustment in policy rates,” he said.

“Going forward, the BSP remains prepared to take appropriate actions as necessary to ensure the achievement of its price and financial objectives,” he added.

The central bank also raised its inflation forecast for full-year 2014 to 4.5 percent from the previous forecast of 4.3 percent. For 2015, the forecast was also adjusted to 3.8 percent from 3.7 percent. For 2016, it was raised to 3 percent from the previous 2.8 percent.

BSP’s ‘big gun’
Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands (BPI), said the BSP had made good use of the available tools to deal with inflation.

“Faced with supply-side inflation threatening the delicate balance of the inflation path, Governor [Amando] Tetangco’s weapon of choice at today’s (September11) policy meeting was his dual-action pistol: a 25 bps hike to both the RRP and SDA,” Mapa said.

“The Governor was wary to bring out the ‘Magnum’ for this meeting as inflation had largely been on the supply side of late. But protracted episodes of elevated inflation prints have taken their toll on the psyche of the consumers and inflation expectations were on the rise. Core inflation printed much higher than anticipated at 3.4 percent and there seems to be no concerted effort from officials from the DA or NFA [Department of Agriculture and National Food Authority] to arrest the situation,” he said.

“Tetangco needed to whip out the ‘Double-Action 45’ to quell latent inflation expectations and let the market know he means business when he targets inflation. Double action also ensures that the move siphons off a considerable chunk of potent domestic liquidity, and although that has been on the downtrend, the Cavalry (national government) did not seem to be coming to the rescue and the Governor needed to do all he could to right the inflation path,” he said.

“Unfortunately, the people who should be listening the most appear to not hear him as the rise in food prices goes unabated. Perhaps the ‘magnum’ will get their attention.”

“Lastly, the move brings the BSP back to monetary policy normalcy, a few months ahead of the projected Federal Reserve interest rate cycle. A dual-action move today brings them to a holding pattern and assures the markets that BSP policy adjustments would be carried out in measured doses, this year and the next,” Mapa added.

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