BSP hikes key rates by 25 bps

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has raised its interest rates on overnight borrowing and lending, as well as on special deposit accounts (SDA) by 25 basis points (bps) in an aggressive stance to ward off inflation risks.

The Monetary Board, the central bank’s policy-setting body, hiked yesterday the overnight borrowing and lending rates to four percent and six percent, respectively.

The SDA rates were likewise increased by 25 bps across the board.

BSP Deputy Governor and officer-in-charge Diwa C. Guinigundo, in a briefing following the MB meeting, said the rate hike was dictated by dangers of strong inflation pressures in 2015 and 2016.

Latest baseline forecasts have shifted closer toward the higher end of the target range of two to four percent for 2015, indicating elevated inflation pressure, he said. Inflation expectations are settling near the upper end of the inflation target range of three to four percent, particularly for 2015.

“The balance of risks to the inflation outlook continues to lean toward the upside, with price pressures emanating from the possible further increase in food prices as a result of tight domestic supply conditions, as well as from pending petitions for adjustments in utility rate and potential power shortages,” Guinigundo said.

He said inflation targets have been also revised in the face of mounting pressures. For 2015, the goal was revised upwards from 3.7 percent to 3.8 percent, and from 2.8 percent to three percent in 2016.

He said government will respond with stronger policy action to rein in inflation expectations, adding they would preempt potential second-round effects even as previous monetary response continue to work their way through the economy.

“The Monetary Board believes that the continued favorable prospects for domestic demand – a evidenced by the stronger GDP (gross domestic product) growth in the second quarter—allow some scope for a further adjustment in policy rates,” the BSP official said.

He stressed that government is prepared to take further policy actions to ensure the achievement of its price and financial stability objectives.

The MB has still two more policy meetings this year, and is expected to take strong policy action in January next year.