BSP holds overnight rate steady, raises reserve ratio

ABS-CBN News

Posted at Jul 28 2011 04:26 PM | Updated as of Jul 29 2011 12:29 PM

MANILA, Philippines (UPDATE) - The Bangko Sentral ng Pilipinas (BSP) kept its policy rates steady and raised banks' reserve requirements, as widely expected, to dampen liquidity from strong capital inflows that threaten to push up inflation beyond target.

The central bank kept the overnight borrowing rate at a two-year high of 4.5%, and the overnight lending rate at 6.5%. It raised banks' regular reserve requirement by one percentage point to 21% to take effect on August 5.

Earlier, 12 of 15 economists polled by Reuters had expected no change in rates, while seven of 12 had forecast a hike in bank's required reserves. Three predicted a 15 basis point increase in rates.

"The BSP policy decision was along our expectations. Despite their mixed rhetoric of late, policymakers had been resolute in singling out flush liquidity as one of the drivers of price pressures, thus following up the June hike with another in July," said Radhika Rao of Forecast Pte, Singapore.

"I think the central bank is right to not be too aggressive in tightening monetary policy. The expected inflation in Philippines is quite benign and within the central bank's target range," added Edward Teather of UBS.

Inflation

The BSP, which meets every six weeks, said inflation expectations remained well-contained, and it sees the rate peaking in the fourth quarter.

This year, the central bank expects inflation to average 4.7%, within the government official target range of 3% to 5%.

Finance Secretary Cesar Purisima earlier said that policymakers want to ensure monetary policy is ahead of inflation and will take into account the peso's strength and strong inflows in their future policy actions.

Policymakers have repeatedly flagged the risks posed by volatile global commodity prices and the prospect of sustained strong capital inflows as yield-seeking investors flock to faster-growing emerging market economies.

Economic Planning Secretary Cayetano Paderanga has said annual Philippine growth in the second quarter was likely to have been faster than the March quarter's 4.9%, but unlikely to outpace the 8.9% growth in same period last year.

The government is targeting growth of 7% to 8% this year, after a 7.6% expansion in 2010. Economists expect growth to slow to 5.4%.

The central bank is expected to resume raising interest rates later this year, and economists have pencilled in at least one more rate increase that would bring the key overnight borrowing rate to 4.75% by year-end.

The Philippines was the last major economy in Asia to hike its policy rates in March after the global financial crisis. - Reuters