MANILA: The Philippine central bank raised its main interest rate on Thursday for the first time in three years to tame price pressures and said its inflation target for next year was at risk, fuelling expectations of further tightening ahead.
The rate increase was its fourth and most aggressive move against inflation in as many meetings. All 12 analysts in a Reuters poll had expected the central bank to tighten policy but only half had expected the benchmark rate to go up.
The policy-making Monetary Board raised the overnight borrowing rate by 25 basis points to 3.75 percent after keeping it on hold since December 2012. It left the rate on its special deposit accounts (SDAs) unchanged at 2.25 percent.
"The BSP (Bangko Sentral ng Pilipinas) wants to ensure that inflationary expectations for 2015 are well anchored. If they had not adjusted rates today, markets and the business community would be concerned that they might end up falling behind the curve," said Emilio Neri, an economist at the Bank of the Philippine Islands.
He said another increase was likely at the next meeting in September.
While the central bank only tweaked its inflation forecasts for 2014 and 2015 marginally, it said the inflation target for next year in particular "could be at risk" from higher food prices, short-term volatility in global oil costs and pending increases in power rates and transport fares.
The central bank now expects average 2014 inflation of 4.33 percent against 4.4 percent previously, and 3.72 percent in 2015 versus 3.7 percent.
"This is the appropriate time to move the policy rate if only to send a signal to the market that the BSP wants to maintain price stability, particularly in 2015, and that it is very serious in its commitment to price stability," Diwa Guinigundo, central bank deputy governor, told reporters.
Governor Amando Tetangco said the rate move was "a pre-emptive response to signs of inflation pressures and elevated inflation expectations", adding that a favourable outlook for domestic demand gave leeway for a measured policy adjustment.
Six out of 12 economists in the Reuters poll had expected an increase in the main overnight policy rate. The other six had expected no change in that rate but a rise in the special deposit account (SDA) rate.
The SDAs are a facility where banks can park funds for seven to 32 days. A higher rate makes it more attractive for them to leave money there, thereby draining liquidity from the system, which may ease inflationary pressure.
The volume of funds in the SDAs has reached 1.2 trillion pesos ($27.5 billion), up 60 billion pesos since the BSP raised the rate on the account by 25 bps in June to 2.25 percent, said Trinh Nguyen, an economist at HSBC in Hong Kong.
The increase in the main overnight borrowing rate made the Philippines the second Southeast Asian country to lift borrowing costs this month to curb price pressures. Malaysia raised rates on July 10.
IMF CUTS FORECAST
Economic growth may be lacklustre in the second quarter due to slower public spending, but strong domestic consumption, exports and rising private investment should continue to support economic activity.
On Friday, the International Monetary Fund cut its growth forecast for the Philippines this year to 6.2 percent from the 6.5 percent seen in March because of weakness in the first quarter and slower public spending.
Latest data show annual money supply growth in June was 23 percent, slower than the 28.4 percent in May, indicating that liquidity is being utilised in the economy and not just left in the central bank's short-term SDA facility, Guinigundo said.
The central bank has taken several modest steps this year to tighten liquidity. In addition to raising the SDA rate, it increased banks' reserve requirements in May and March.
It may have opted to hold off on another SDA rate rise this time as it was concerned about higher operational costs, Nguyen at HSBC said, but another increase to 2.5 percent is likely this year due to persistently high liquidity growth.
Tetangco said on Wednesday inflation would probably be between 4.1 and 4.9 percent in July, pushing up against the top end of the central bank's 3 to 5 percent target range for this year. It has a target of 2 to 4 percent for 2015.
Inflation averaged 4.2 percent in the first half, up from 3 percent for the whole of 2013, with prices of food and non-alcoholic drinks posting their biggest increase since April 2009.
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