The Bangko Sentral ng Pilipinas may be prompted to raise interest rates and the reserve requirement further this year as price pressures, including those from inflows of foreign hot money, are seen to remain significant.
This projection was made by Credit Suisse, which said the BSP might raise key interest rates by another 50 basis points and the reserve requirement by “a bit more” before the year ends in an effort to ensure average inflation would not exceed the target ceiling of 5 percent.
So far this year, the BSP has raised its key policy rates by a total of 50 basis points and the reserve requirement by a total of 2 percentage points. The key policy rates are at 4.5 and 6.5 percent for overnight borrowing and lending, respectively, while the reserve requirement is at 21 percent, back to the level prior to the latest global economic crisis.
“It is worth noting that in spite of the 50-basis-point hike in policy rates so far, the interbank rates are still near their historic lows,” Credit Suisse said in its latest paper on the Philippine economy.
The international investment bank said the enormous amount of liquidity enjoyed by the banking system was making it difficult for the 50-basis-point increase in the key policy rates to influence an equal amount of increase in commercial interest rates.
A BSP official agreed, noting that although the key interest rates of the central bank have been raised by 50 basis points so far this year, commercial interest rates have only increased by 23 basis points.
An increase in the key policy rates is meant to influence a similar increase in commercial interest rates to temper future growth in loans and, in the process, slow down consumption and inflation.
Similarly, the increase in the reserve requirement is meant to temper growth in the amount of money available in the banking system for loans, with the end goal of slowing down future inflation.
The moves were made amid previous projections that inflation, which hit 4.3 percent in the first half, could average beyond the 5-percent threshold of the government.
Credit Suisse, however, said the liquidity-tightening measures so far implemented could still be insufficient to ensure a within-target inflation for 2011.
It said inflation might even touch 6 percent in the fourth quarter. Credit Suisse said such a projection was not really worrisome, but it might prompt further monetary action by the BSP.
Monetary officials said one of the factors that could push inflation higher in the short term was the steep rise in foreign portfolio investments or “hot money.”
Data from the central bank showed that net inflow of foreign portfolio investments surged to $2.36 billion in the first half, up 245 percent from $687 million in the same period last year.