MANILA, Philippines - The central bank will likely keep rates steady in its policy meeting on Thursday given moderating price pressures, but the prospect of sustained capital inflows may trigger another increase in banks' required reserves to dampen rising liquidity.
Twelve of 15 economists polled by Reuters expect the Bangko Sentral ng Pilipinas (BSP) to keep policy rates steady at 4.5%, while seven of the 12 forecast a one percentage point increase in banks' reserve requirements. Three expect rates to be raised by 25 basis points.
The central bank is expected to resume its rate hike campaign later in the year, with majority of economists looking for at least one more rate increase to bring the benchmark rate to 4.75% by the end of the year.
At the last BSP meeting, in June, rates were left at 4.5% while the reserve-requirement was raised to 20% from 19%.
BSP Deputy Governor Diwa Guinigundo said on Tuesday the central bank may adjust its monetary policy if the global economy's multispeed recovery continues to fuel strong inflows to emerging markets and pose risks to domestic liquidity and inflation.
A one percentage point increase in bank reserves would take them back to pre-global crisis levels of 21%, while a 25 basis point rise in the overnight borrowing rate to 4.75% would be the highest since March 2009.
BSP Governor Amando Tetangco said on July 15 that inflation this year could be lower than what the BSP had assumed at its last policy review in June, when it forecast inflation to be at the high end of its target range.
The central bank, which uses an inflation targeting model to set policy, wants to keep average inflation for the year and next year at 3% to 5%. Inflation averaged 3.8% in 2010.
Annual inflation in July was forecast to come in between 4.3% and 5.2%, after 4.6% in June. An inflation rate above 5% would be the highest since March 2009 when the rate was 6.4%, based on the old data base using 2000 prices.
Bank lending grew an annual 18.8% in May, the fastest in two years, but Tetangco said in an interview with Reuters this month a single-month's reading did not raise concerns.
Money supply, a measure of money circulating in the economy, grew 8% in the same month from a year earlier, moderating from low double-digit levels in March and December.
The market has already priced in a one percentage point hike in reserve requirements, so any impact on bond yields is likely to be limited. But a decision to raise rates by 25 basis points would trigger selling of bonds.