MANILA, Philippines -- The Bangko Sentral ng Pilipinas, the counry?s central bank, is expected to leave key interest rates steady next week but policymakers may be forced to lift rates within the year to curb rising inflation, economists said on Friday.
The central bank will hold its policy-setting meeting next Thursday and will likely keep its overnight rate at 5.0 percent for borrowing and 7.0 percent for lending, according to five economists polled by Thomson Financial.
Policymakers kept interest rates unchanged at the last meeting on March 13 after slashing them by a total 100 basis points between October and January amid rising inflationary pressure.
The Philippine consumer price index rose 6.4 percent in March from a year earlier, its fastest clip in 21 months, amid surging food and energy prices.
Economists say inflation, which is running above the government's full-year target of 3.0 percent to 5.0 percent, could soar to as high as 9.0 percent in the second quarter.
Soaring prices of basic commodities may crimp consumer spending, a key driver of growth for the Southeast Asian nation, and this worry is weighing on the Philippine peso. At the start of the year the central bank said inflation should remain within its target as the firm peso would help keep imported oil and other commodities less expensive.
"The rise in inflation has been negative for the peso," said Bear Stearns & Co. in a recent note.
It also said that Philippine inflation might be "lagging behind a similar pattern of rising inflation levels in Indonesia (currently at 8.17 percent) by three to four months."
The peso has weakened by less than 2.0 percent against the US dollar so far this year, after gaining nearly 19 percent in 2007 on strong foreign exchange inflows.
To control domestic liquidity, which had been expanding at alarming rates because of strong remittances from Filipinos working abroad, the Philippine central bank widened last year its special deposit account (SDA) windows to encourage more financial institutions, including those state-owned, to place more funds with the central bank.
But last month the central bank announced changes to the terms of the SDA facility, shutting the windows for two-, three-, and six-month tenors, and reducing interest rates on the remaining shorter maturities. The move was intended to boost banks' loanable funds that will help ensure the domestic economy keeps growing.
"Despite the recent inflation surprise, the authorities appear (to be) in a holding pattern, awaiting evidence of a cooling in price pressure over the coming months," said Frederic Neumann, economist at HSBC in Hong Kong, who expects the Philippine central bank to keep rates and access to the SDA facility unchanged next week.
But Neumann said price pressures are likely to be stronger than earlier thought, with headline inflation possibly rising as high as 8.0-9.0 percent by this summer.
The Philippines is one of the world's top importers of rice, the staple food for this country of nearly 90 million people, and is also a net oil importer.
Rice prices surged 10.9 percent in March after rising 7.7 percent in the previous month.
Experts say rice prices are likely to keep surging as production of the grain fails to keep up with increasing demand.
Rising food costs have overtaken high energy prices as the primary inflationary threat in some Asian countries.
But record oil prices continue to add to inflationary pressures. The price of crude struck a new record high this week above $115 a barrel on the New York Mercantile Exchange amid a weakening dollar.
Rising food and energy costs have already triggered calls for hikes in wages and transport fares in the Philippines.
"Even with cooling growth, inflation is likely to linger for some time as second-round effects kick in. We therefore expect the central bank to raise rates over the course of this year, with a 25-basis point hike possible soon, with more to come thereafter," said HSBC's Neumann.
Economists at Bear Stearns said the Philippine central bank might have prematurely lowered interest rates and "may face the embarrassing task of raising these rates again in coming months."
But Jonathan Ravelas, chief strategist at Banco de Oro Unibank, said monetary authorities will likely stick to their wait-and-see stance for a few more months.
"The rise in inflation is driven by supply-side developments and the central bank is unlikely to respond to these developments with tightening measures, and also because there is a need to stimulate the domestic economy given the global economic slowdown," Ravelas said.