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Interest rates were raised yesterday for the first time since 2011 as monetary authorities, confident that the economy was strong enough to take it, sought to curb excess demand that could push consumer prices further up.
The Bangko Sentral ng Pilipinas (BSP) noted that food prices remained elevated and prospects for the rest of the year remained uncertain given the lingering damage from recent typhoons and pending petitions for utility rate increases.
“Latest baseline forecasts indicate that the inflation target could be at risk,” BSP Governor Amando M. Tetangco Jr. said in a statement.
The BSP’s overnight borrowing and lending rates were increased by a quarter of a percentage point to 3.75 percent and 5.75 percent, respectively. Both benchmarks stood at record lows since late 2012.
He said the balance of risks to the inflation outlook “continues to be tilted toward the upside,” citing higher food prices, short-term volatility in international oil prices and pending petitions in power rates and transport fares.
Yesterday’s action followed three consecutive policy meetings that have seen monetary settings tightened. In April and May, banks were told to set aside more of their clients’ deposits as reserves. In June, the central bank ordered an increase in the yields for special deposit accounts (SDAs), which encourage banks to keep more funds parked idle in BSP vaults.
According to Tetangco, the move to raise rates showed that growth in the amount of money circulating in the economy, which was the primary concern in the last three meetings, was no longer an issue.
Inflation for this year is expected to average 4.33 percent versus the previous forecast of 4.4 percent and last year’s 3 percent. The new projection is within but above the midpoint of the target range of 3 to 5 percent.
Next year, inflation is seen at 3.72 percent, higher than the previous forecast of 3.65 percent. The inflation target for 2015 is 2 to 4 percent. The BSP also issued a forecast of 2.8 percent for 2016. The target for that year is also 2 to 4 percent.
Singapore-based Gundy Cahyadi, an analyst at Barclays Bank, said the BSP was making the adjustment from the position of strength.
“Expect the BSP to raise the key policy rate by another 25 basis points in September before standing pat and leaving it at 4 percent for some considerable time,” he said.
Economic growth numbers for the second quarter, scheduled for release at the end of this month, would also be considered in the next policy meeting. BSP Deputy Governor Diwa C. Guinigundo said the state of the country’s economy should show whether further adjustments could be absorbed.
“What we want is a good convergence between good economic growth and stable prices,” he told reporters at a press conference following the announcement.
In January to March, economic growth slowed to 5.7 percent from the previous quarter’s 6.3 percent.