BSP ready to tweak policy settings

The central bank is ready for further tweaks in policy settings, officials said Monday, barely a week ahead of the next monetary board meeting.

Sustained robust domestic economic activity, the Bangko Sentral ng Pilipinas (BSP) said, provides comfort that a slowdown would be averted if adjustments are made.

“Prevailing monetary inflation dynamics suggest space to keep rates unchanged appears to be narrowing,” said Dennis Lapid, Deputy Director of the BSP’s Economic Research department.

Speaking at the BSP’s quarterly inflation press conference, Lapid said the Monetary Board remained wary of risks to consumer prices, which remain on the “upside.”

He said these risks were rising food and fuel prices, pending petitions for power rate adjustments, and excess liquidity in the economy.

At its last policy meeting, the Monetary Board (MB) ordered banks to set aside more of their clients’ deposits as reserves in a bid to mop up excess cash from the economy.

Reserve requirements for major banks were hiked by one percentage point to 19 percent.

“The BSP stands ready to deploy appropriate measures to ensure sustainable, non-inflationary, and inclusive economic growth,” Lapid said.

Effects of the hike in reserve requirements will be reflected in April data for the country’s money supply.

Latest data from the BSP showed domestic liquidity rose by 36.4 percent in February of the year, slower than the previous month’s 37.3 percent.

Despite the deceleration, growth in M3 was still higher than the below 20-percent growth rate considered “normal” by the BSP.

“If prolonged, these could translate to higher inflationary pressures,” Lapid said.

Inflation, or the average rise in consumer prices across the country, was clocked in at 3.9 percent in March, slowing from 4.1 percent the month before.

The BSP expects inflation for 2014 to average at 4.2 percent, faster than last year’s 3 percent.

The inflation forecast for the year is above the midpoint of the BSP’s target range for the year of 3 to 5 percent.

The BSP’s benchmark overnight borrowing and lending rates have been at their record lows of 3.5 and 5.5 percent, respectively, since last 2012.

The BSP in its quarterly inflation report said the improving economic prospects of advanced economies like the United States may cause instability in the near term, but long term benefits were also forthcoming.

“For emerging markets in particular, a key downside risk emanates from increased financial market volatility due in part to uncertainty over the ongoing normalization of monetary policy in the US,” the BSP said.