Key interest rate hikes seen in 2015
The Bangko Sentral ng Pilipinas (BSP) is expected to raise key policy interest rates by a total of 50 basis points in 2015 to temper pressures from strong liquidity and credit growth, the chief strategist of Banco de Oro Unibank said.
After the decline in interest rates to record lows amid benign inflationary pressures in 2013, the BSP had started tightening monetary policy in 2014 to anchor inflationary expectations.
For 2015, BDO estimates the inflation rate to average at 3.8 percent on account of lower prices of crude oil in the world market, said economist Jonathan Ravelas.
In the first 11 months of 2014, the inflation rate averaged at 4.3 percent, hovering above the midpoint of the 3-5 percent target range of the inflation-targeting BSP.
Ravelas said the BSP may gradually raise policy rates by another 50 basis points to 4.5 percent this year. He noted that the BSP had factored in a softer inflation forecast of 3.72 percent for 2015.
“Note, however, that in spite of these hikes, interest rates will still be lower and more manageable compared to the historical double-digit levels in the 1990s as liquidity in the country remains ample,” Ravelas said. “This will continue to support spending and investments and will help boost the country’s economic growth.”
Ravelas noted that inflation rate advanced in mid-2014, driven mainly by the jump in prices of food and nonalcoholic beverages, and higher water, gas, and electricity rates.
However, the inflation rate eased in the fourth quarter of the year due to the significant drop in oil prices.
The economist said the adjustments made by the BSP in monetary policy in 2014 were aimed at containing inflation as supply interruptions continued to put pressure on prices.
In 2014, the BSP’s policy-making Monetary Board increased the reserve requirements of universal and commercial banks by 2 percentage points to 20 percent. It also hiked the rates on the special deposit accounts—the monetary tool that controls liquidity that can spill over to a broader market – by 50 basis points to 2.5 percent.
Lastly, the BSP raised key overnight borrowing and lending rates last year by a total of 50 basis points to 4 percent and 6 percent, respectively.
“These tweaks in the monetary policies were done to address financial stability risks associated with the strong domestic liquidity and credit growth,” Ravelas said.
