Several factors point to BSP tightening

Photo shows a Philippine wet market. Central bank chief Amando M. Tetangco Jr. said risks to price stability continue to mount, increasing the chances that monetary authorities would move once again to siphon off more cash from the economy to curb excess demand. AFP FILE PHOTO

MANILA, Philippines–Central bank chief Amando M. Tetangco Jr. said risks to price stability continue to mount, increasing the chances that monetary authorities would move once again to siphon off more cash from the economy to curb excess demand.

The Bangko Sentral ng Pilipinas (BSP) governor this week cited several factors that would likely lead to upward revisions of inflation forecasts for this year and 2015. The BSP’s Monetary Board meets Thursday to discuss the possibility of tightening policy settings further.

“Given these pressures, I think that there would be an upward adjustment in the inflation forecasts,” Tetangco told reporters on Wednesday.

These adjustments would move the BSP’s inflation forecasts for 2014 and 2015 even closer to the top end of the official target ranges for both years.

Following the central bank chief’s comments on inflation, the peso collapsed late in trading Wednesday to close well past the 44-to-$1 range.

After opening at 44.02 to $1, the peso was weaker all day and traded within a range of 43.96 to 44.05 for most of the trading session before closing at its intraday low of 44.12.

Trading was thin at $669.5 million.

For Thursday’s meeting, several factors would be on the table for the Monetary Board to discuss, Tetangco said. These include the effects of recent policy moves by the BSP on monetary conditions. At its last two meetings, the Monetary Board raised the reserve requirement ratio for local banks by a total of two percentage points.

The BSP estimated that these increases, which forced banks to park more of their clients’ deposits as reserves, would suck up around P120 billion in cash from the economy.

Recent and future policy adjustments by the US Federal Reserve, particularly its “lift off” to higher interest rates, which could lead to further volatility in financial markets, would also be under close watch.

Geopolitical conditions in the Middle East, particularly Iraq, and China’s decelerating economic growth—both of which could have effects on food and fuel prices—were also among the chief concerns, Tetangco said.