BSP set to tighten policy to fight inflation

By Karen Lema, Reuters

Posted at Jul 31 2014 09:51 AM | Updated as of Jul 31 2014 05:51 PM

MANILA - The Philippine central bank looks set to tighten monetary policy for the fourth meeting in a row on Thursday, raising either its main overnight borrowing rate or the rate on its special deposit accounts (SDAs) to stay on top of inflation.

Governor Amando Tetangco reinforced those expectations on Wednesday, when he forecast inflation would be between 4.1 and 4.9 percent in July, pushing up against the top end of the central bank's 3 to 5 percent target range for this year.

The central bank "stands ready to implement policies to keep inflation expectations well anchored," Tetangco said in a text message to reporters.

Bangko Sentral ng Pilipinas, the central bank, has a target of 2 to 4 percent for 2015.

"If the central bank wants to get hold of inflation down the line and stifle inflation expectations, they will act sooner rather than later," said Nicholas Mapa, an economist at Bank of the Philippine Islands (BPI).

BPI was one of six respondents in a Reuters poll of economists to forecast a 25 basis point increase in the main overnight borrowing rate to 3.75 percent on Thursday.

The remaining six forecast no change in the benchmark rate but predicted a quarter-point increase in the special deposit account (SDA) rate to 2.50 percent.

One economist thought the central bank would raise both rates.

The SDAs are a facility where banks can park 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.

An increase in the main overnight borrowing rate would be the first in three years and would make the Philippines the second Southeast Asian country to lift borrowing costs this month to curb price pressures. Malaysia raised rates on July 10.

Philippine inflation averaged 4.2 percent in the first half, up from 3 percent for the whole of 2013, due largely to higher prices for food, including rice, as well as for transport and power, caused by a series of strong typhoons and higher global oil prices.

Prices of food and non-alcoholic drinks rose 7.4 percent in June from a year earlier, the biggest increase since April 2009. Food prices alone also saw their biggest rise in more than five years at 7.8 percent. Food accounts for 39 percent of the consumer price basket.

On Monday, President Benigno Aquino authorized the state grains agency to import an additional 500,000 tonnes of rice for emergency needs to help bring down record-high prices of the national staple.

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.