Philppines raises rate 25 bps to curb inflation pressures

    The Philippine central bank raised its key policy rates by 25 basis points, as expected, in what it described as "a preemptive response to signs of inflation pressures and elevated inflation expectations," along with "preemptive measures in the context of the eventual normalization of monetary policy in some advanced economies."
    Bangko Sentral ng Pilipinas (BSP) has been tightening its policy stance since March by raising reserve requirements and last month, when it raised the rate on its Special Deposit Account (SDA), warned that it was ready to undertake further policy actions to safeguard price and financial stability.
    The BSP raised its overnight borrowing, or reverse repurchase facility, to 3.75 percent from 3.50 percent, and the overnight lending, or repurchase facility, to 5.75 percent while it left the SDA rate steady at 2.25 percent and the reserve requirements.
    "Going forward, the BSP will remain vigilant against risks to price and financial stability and stands ready to undertake further policy actions as necessary," the central bank said.

    The BSP had left the benchmark overnight borrowing rate steady since October 2012 but raised the rate today after forecasts showed inflation shifting closer to the higher end of the BSP's 2015 target range of 3.0 percent, plus/minus one percentage point.
    The Philippine headline inflation rate eased to 4.4 percent in June from 4.5 percent in May, but the central bank said the balance of risks continue to be tilted to the upside with price pressures from higher food prices, short-term volatility in international oil prices and pending increases in power rates and transport fares.
    "Given these considerations, the Monetary Board believes that an increase in the BSP's policy rates will moderate inflation pressures and arrest potential second-round effects by helping anchor inflation expectations," the central bank said.

    This year the BSP has an inflation target of 4.0 percent, plus/minus one percentage point, and the BSP had expected 2014 inflation to average 4.4 percent and then ease to 3.7 percent in 2015.

    Economists expect inflation in July to accelerate due to higher food prices and disruptions in supply from typhoons.
    A continued favorable outlook for domestic demand also allows scope for a "measured adjustment in policy rates" without adversely affecting growth prospects, the BSP added.
    The Gross Domestic Product of the Philippines expanded by 1.2 percent in the first quarter of this year from the previous quarter for annual growth of 5.7 percent, down from 6.3 percent.
    Earlier this month the deputy governor of the BSP had said there was room for measure policy adjustments without hurting the economy and the International Monetary Fund recently cut its growth forecast for 2014 to 6.2 percent from a previous 6.5 percent.
    The Philippine government has a target of 6.5 to 7.5 percent growth this year after 7.2 percent last year.

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