BSP: Economy can absorb interest rate hikes

MANILA, Philippines–The Bangko Sentral ng Pilipinas said on Friday that the two interest rate increases so far this year were not expected to cause a drag on the economy, and added that growth targets remained attainable.

BSP Deputy Governor Diwa Guinigundo said there were sufficient available funds in the economy that could be used to finance investment plans and to support consumption.

The move of the BSP to raise interest rates, by 25 basis points in March and by another 25 basis points last Thursday, was meant to only siphon off excess liquidity in the economy to avoid an acceleration of price increases. Growth of the economy should remain healthy, he said.

“The 50-basis-point [total] increase can be very well absorbed by the economy without affecting growth,” Guinigundo said.

He cited rising production of the country’s manufacturing sector, noting that manufacturing firms had been producing using at least 80 percent of their capacity over the past months.

The economy grew 7.3 percent last year. The government aims to keep the economy’s growth above 7 percent every year over the medium term.

Need to curb inflation

Last Thursday, the BSP implemented another 25-basis point increase in its key policy rates following a similar move in March, citing the need to curb inflation.

The overnight borrowing and lending rates of the BSP now stand at 4.50 and 6.50 percent, respectively.

The move is expected to influence commercial interest rates to rise as well.

The rate increases came amid rising price pressures largely brought by increasing oil prices in the world market. The Philippines is highly vulnerable to rising crude prices in the global market given that it imports bulk of its oil requirements.

The pending wage increase was another factor expected to increase price pressures.

The government has set a goal of limiting inflation this year and next to a range of 3 to 5 percent.

Without the interest rate increases, Guinigundo said inflation could hit 5.6 percent this year and 4.16 percent in 2012. With the rate adjustments, he added, inflation would be no more than 5 percent this year and below 4 percent next year.

The National Statistics Office reported the other day that inflation in April hit 4.5 percent, the fastest in 12 months. Average inflation for the first four months of the year stood at 4.2 percent.