MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) sees no urgent need to adjust its key policy rates amid the sharp rise in inflation last month as well clamor from various sectors for the central bank to adjust its accommodative policy stance.
BSP Governor Amando M. Tetangco Jr. said in an interview with reporters that the country’s inflation forecast would likely be adjusted upwards this week but would still fall within the target set by monetary authorities.
The BSP has set an inflation target of three percent to five percent between 2011 and 2014 but sees inflation averaging 3.6 percent this year and three percent next year.
“But even if there is increase in the forecast our reading continues to be that the inflation rate for this year and next year will still be within the inflation target. There might be some upward adjustment but even with this the inflation forecast will still be within the inflation target range for both this year and next year,” he stressed.
The BSP is scheduled to hold its first policy setting meeting this year on Thursday.
Inflation kicked up to a four-month high of 3.5 percent in January from three percent in December due to higher food and oil prices. Inflation averaged 3.5 percent in September last year.
Due to benign inflation outlook, the BSP has kept its key policy rates at record levels for 13 consecutive policy setting meetings held every six weeks since July of 2009.
The BSP’s Monetary Board slashed interest rates by 200 basis points between December 2008 and July 2009 to cushion the impact of tjhe global financial crisis on the domestic economy. This brought the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent.
Economists and analysts believe that the BSP has been behind the curve as it has sticked to its accommodative policy stance for too long.
However, Tetangco said the BSP has enough elbow room under its inflation targeting framework as consumer prices remain under control at the moment.
He added that inflation expectations remain within the inflation target for the next two years.
“If the inflation forecast is within your inflation target then really there’s no urgency for an increase in interest rates,” the BSP chief stressed.
He explained that monetary authorities would continue to monitor developments such as the increase in global commodity prices to determine if there is a need to change its current policy stance.
“If there’s an indication that it has started to affect the demand side then the monetary board will have to make an assessment as to whether there is a need to adjust the interest rates,” he said.
Earlier, Tetangco said inflation could average between 3.8 percent and 4.2 percent this year if the upside risks to consumer prices materialize resulting to a major build up in inflationary pressures.
Inflation last year averaged 3.8 percent from 3.2 percent in 2009.
The BSP has identified the upside risks to inflation as potential upward pressures to commodity prices given sustained demand from emerging markets as well as demand-induced price pressures from a stronger-than-expected domestic economy.
Other upside risks include the cost-side pressures from the likelihood of further adjustments in domestic rice prices and electricity charges as well as the potential price impact of weather disturbance on agricultural production.
On the other hand, downside risks include the sustained appreciation of the peso against the US dollar as well as uncertainty over the pace of global economic recovery particularly from advanced economies that would temper commodity price increases.