Philippines rates unchanged, inflation forecasts raised

The Philippine central bank left its key policy rate unchanged on Wednesday, as widely forecast, but expectations of a rate rise in the first half of 2011 firmed as it raised inflation forecasts for coming years. There were inflationary pressures from global oil and food prices as well as hikes in domestic road tolls, and momentum in demand growth could further add to the build-up, the Bangko Sentral ng Pilipinas (BSP) said at its six-weekly policy review.
The central bank held the policy rate steady at a record low of 4.0 percent for a 13th consecutive meeting, leaving the Philippines as one of the few Asian countries not to have raised interest rates since the global financial crisis. "They are an inflation-targeting central bank and currently inflation is below their target," UBS economist Edward Teather said. "We are expecting them to raise policy rates in the coming year, but the timing would be closer to the middle of the year rather than near term on account of the favourable price and credit growth environment at the moment."
The forecast for inflation in 2010 was raised to 3.8 percent from 3.63 percent, although that is still at the bottom of the government's 3.5 to 5.5 percent target range. Average inflation in 2011 is now seen at 3.6 percent, up from a forecast of 2.35 percent last month, and in 2012 it is seen at 3.0 percent from a previous forecast of 2.8 percent, Deputy Governor Diwa Guinigundo told reporters.
Guinigundo said the increase in the 2011 forecast reflected the impact of a higher-than-expected inflation in November, higher oil prices, and a view the peso would settle at a weaker level next year due to a smaller balance of payments surplus.
Still, monetary authorities said inflation remained manageable and was on course to be within the government's target of 3 to 5 percent for both 2011 and 2012. Ahead of the decision, six of 10 economists polled by Reuters had expected the central bank to lift its policy rate by 25 basis points to 4.25 percent in the first half of next year.
"Since the government is pursuing fiscal consolidation, it is important that the monetary policy settings remain accommodative to support growth," HSBC economist Sherman Chan said.
"Also, rate hikes could attract more capital inflows, which would put further upward pressures on the peso and in turn hurt exports. So there is really no point to hike rates now," he said, adding he expected rates to rise in the second quarter of 2011. The central bank has repeatedly said it was not considering capital controls but did want to mange inflows, saying while they could complicate policy-making the Philippines needed foreign investment to upgrade its infrastructure and boost the economy.