BSP widely expected to tighten monetary policy

MANILA, Philippines—The Bangko Sentral ng Pilipinas will likely hike key interest rates by as much as 75 basis points this year to temper inflation pressures, an economist of the Bank of the Philippine Islands said Wednesday.

This wave of interest rate increases may begin Thursday with at least a 25-basis-point increase in the BSP’s overnight borrowing rate from the record low level of 4 percent, BPI economist Emilio Neri Jr. said during a Chamber of Thrift Banks forum.

“There will be at least [a] 25-basis-point [hike] even if inflation is really coming from demand rather than supply side,” Neri said.

The interest rate hike is necessary to ease supply-side pressures when inflation expectations rise, Neri said. For instance, he noted, prices of basic commodities would otherwise surge if traders were to start hoarding goods.

In an interview after the forum, Neri said the BSP could cap total interest rate increases for the year to 75 basis points.

The economist added that the higher-than-expected inflation for February would prompt the BSP to make its move now.

During the forum, Neri noted the potential fallout from Japan over the short term. But he added that reconstruction efforts would eventually allow one of the world’s largest economies to grow faster.

In BPI’s latest monthly economic commentary, bank economists said that even with the recent headline inflation bulge and comments that the BSP could be “behind the curve,” Philippine economic managers would “still be mindful of premature and excessive tightening that could stifle the country’s all-too fragile growth prospects.”

At the most, the BPI research said, the increase in policy rates would be around 100 basis points.

The research added that BPI may raise its 4.6 percent average 2011 inflation forecast, depending on how global oil prices behave for the rest of 2011.