MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) held interest rates steady at a policy review on Thursday, judging that risks of a global slowdown and signs of moderation in inflation pressures gave it time to pause after raising rates at its past two meetings.
But it raised banks' regular reserve requirements by one percentage point, taking total reserve requirements to 20% from June 24, saying it was a preemptive move to counter liquidity pressures, which could be fueled by expected inflows and economic strength.
Average inflation was expected to be at the high end of the 3% to 5% target this year, and below 4% in 2012. The BSP said inflation expectations were leveling off and the inflation rate would peak in the fourth quarter.
The overnight borrowing rate was held at 4.5% and the overnight lending rate was kept at 6.5%. Ten of 16 economists in a Reuters poll had forecast a rate rise in June.
"Given the lower-than-expected inflation reading for May, there's room for the BSP to pause and assess economic conditions both domestically and globally," HSBC economist Sherman Chan said.
"That said, with inflation still expected to accelerate in coming months, we believe the BSP will keep raising rates in the second half of the year."
The decision came soon after India raised rates for the 10th time since March 2010 as it battles persistently high inflation, still a problem in much of Asia.
China raised reserve ratios for the ninth time since October on Tuesday, and the Bank of Korea raised interest rates for the third time this year on June 10.
The BSP estimated its increase in regular reserve requirements would drain about P38 billion from the financial system, helping head off potential inflation.
"A situation where you have excess liquidity could blunt the effectiveness of interest rates moves," BSP Deputy Governor Diwa Guinigundo said.
Benign inflation last year allowed the BSP to hold off on tightening longer than any other major Asian central bank as the region rebounded strongly from the global financial crisis.
Headline inflation in May was 4.5%, well below market forecasts but higher than a downwardly revised 4.3% in April. Core inflation edged up to 3.7%, the highest since September 2010 but also below market forecasts.
The BSP said while forecasts showed a lower path for inflation, suggesting the rate hikes in March and May were having an impact, it would remain vigilant on price risks.
Most analysts expect the overnight rate to end 2011 at 5%, with forecasts ranging from 4.75% to 5.25%.
The Southeast Asian economy grew a seasonally adjusted 1.9% in the first quarter, picking up from fourth-quarter growth of 0.5%, but annual growth slowed to 4.9%.
Tetangco said after the growth data it would be challenging to meet the government's growth target of 7% to 8%, noting it had been set before the unrest in the Middle East and North Africa, and Japan's disasters in March.
"We are still considering the aspirational growth target of 7% to 8% and the market assumption of between 5% to 6% in the formulation of monetary policy," Guinigundo said.