MANILA, Philippines (2nd UPDATE) - The Bangko Sentral ng Pilipinas (BSP) tightened policy for the third straight meeting on Thursday, surprising markets by raising the rate on special deposits in a bid to contain liquidity growth and curb inflation pressures.
The central bank also increased its forecast for this year and 2015 for inflation, which in May hit a two-and-a-half year high of 4.5 percent.
It now sees average inflation at 4.4 percent in 2014 from 4.3 percent previously, above the midpoint of the 3-5 percent target.
The central bank expects inflation to be 3.7 percent next year, near the top end of a 2-4 percent goal.
With mounting inflation risks, the BSP could be the first Southeast Asian central bank to raise its benchmark rate this year. The last regional central bank to raise rates was Indonesia, in November, to support its fragile currency.
"We see scope for a policy rate hike in the second half, particularly if inflationary pressure continues unbridled, with the first increase as soon as in the next monetary policy meeting," said Bernard Aw, research analyst for emerging Asia at Forecast PTE in Singapore.
The BSP kept its policy rate unchanged at a record low of 3.5 percent, its level since October, as expected. Nine of 12 analysts in a Reuters survey had forecast a hold, with the other three seeing an increase.
USING ANOTHER LIQUIDITY TOOL
But the BSP increased the rate of its short-term Special Deposit Account (SDA) facility, also a liquidity tool, by 25 basis points to 2.25 percent.
The SDA, a central bank facility where banks can park funds for 7 to 32 days, had attracted a record volume of money before the central bank cut the rate starting in July 2012. Before Thursday, the SDA rate last changed in April 2013, when it was cut by half a percentage point to 2.0 percent to encourage banks to step up their lending.
Four out of 11 analysts in the Reuters poll had expected the SDA rate increase of 25 bps. The rest had expected no change.
"The Monetary Board decided to adjust the SDA rate to counter risks to price and financial stability that could emanate from ample liquidity, noting that a modest upward adjustment in interest rates would be prudent amid robust credit growth," BSP Governor Amando Tetangco told reporters after the policy meeting.
It was the third policy tightening move by the BSP, after it raised banks' reserve requirement ratio by a total two percentage points to 20 percent at the last two policy meetings.
The central bank said the current reserve level is on the "high side" and a further hike of it might not be good for markets.
"A further adjustment in the reserve requirement might lead into financial disintermediation," Diwa Guinigundo, central bank deputy governor, told reporters.
The SDA rate hike was meant to signal the BSP's commitment to tightening monetary policy, said Trinh Nguyen, economist at HSBC in Hong Kong.
"We believe it is a beginning of more serious rate hikes to temper inflationary pressures, which have risen significantly," Nguyen said.
"We expect 2 more 25bps hikes in the second half, taking the SDA rate to 2.5 percent and the policy rate to 4.0 percent by year end."
Inflation is expected to accelerate in coming months following increases in basic food costs, a recent transport fare hike and the impact later this year of an El Nino dry weather phenomenon on power and farm output.
The central bank has said it was cautious about the impact of its policy actions on the broader economy, especially after the Philippines recorded its slowest pace of growth in two years in the first quarter due to last year's super typhoon and slower state spending.