BSP may tighten again to tackle inflation

By Karen Lema, Reuters

Posted at Jul 28 2014 03:22 PM | Updated as of Jul 29 2014 02:39 AM

Analysts split on whether main policy rate will rise

MANILA (UPDATE) - The Philippine central bank is expected to tighten policy for the fourth straight meeting on Thursday to tackle inflationary pressure, by raising either its main overnight borrowing rate or the rate on its special deposit accounts (SDAs).

Twelve economists polled by Reuters were split down the middle on the main rate six expected no change but the remaining six forecast it would be raised by 25 basis points to 3.75 percent, which would be the first rise in three years.

Even the six who forecast no change thought the central bank would tighten monetary conditions slightly by raising the rate on its SDAs for the second meeting in a row, which should have the effect of draining liquidity from the system.

One economist thought Bangko Sentral ng Pilipinas (BSP) would raise both rates.

Expectations of a rise in the overnight rate mounted after inflation averaged 4.2 percent in the first half, above the mid-point of the central bank's 3 to 5 percent target range for this year and outside its 2 to 4 percent goal for 2015.

Prices are expected to push still higher in coming months.

"Inflation in July is seen rising at a faster pace due to the impact of higher food prices and supply disruptions from typhoons," said Kenneth Cheng, an economist at Informa Global Markets in Singapore.

"This should prompt the BSP to hike overnight rates by 25 basis points ... to mitigate the potential build-up in inflationary pressures."

Official July inflation data will be released on Aug. 5.

The central bank has already taken several modest steps this year to tighten liquidity and hold down price pressures, raising the rate on the SDAs in June by 25 basis points to 2.25 percent and raising banks' reserve requirements in May and March.

The SDAs are a facility where banks can put funds for between seven and 32 days. Raising the rate could make it more attractive for banks to leave money there, thus draining liquidity from the system.

Annual money supply growth stood at 28.4 percent in May but that was an 11-month low and the central bank expects it to decelerate further, helped by earlier policy tweaks and as the market fully absorbs revisions in the SDA facility last year.

"Liquidity growth is slowing but it continues to be in the system. Essentially it will go to consumption if it has nowhere else to go," said Joey Cuyegkeng, an economist at ING.

"The economy continues to expand but absorptive capacity is thinning. Therefore, if liquidity continues to be there, eventually prices will go up," he added.

The consensus from a Reuters quarterly poll in July was for the central bank to start raising the main policy rate from its record low of 3.5 percent in the third quarter, pushing it to 4.0 percent before the end of the year.

BSP Deputy Governor Diwa Guinigundo said on July 11 there was room for measured policy adjustments without hurting the economy, which grew at its slowest pace in two years in the first three months of the year.

On Friday the International Monetary Fund cut its growth forecast for the Philippines this year to 6.2 percent from the 6.5 percent seen in March because of weak growth in the first quarter and slower public spending.

The government has set a target of 6.5 to 7.5 percent for gross domestic product growth this year after 7.2 percent last year.