MANILA: The Philippine central bank raised both its policy rate and the rate on its special deposit accounts on Thursday, in its most aggressive move to curb inflation amid buoyant economic growth.
The monetary authorities said the economy, which grew at its fastest pace in more than a year in the second quarter, was strong enough to absorb the impact of higher borrowing costs.
The overnight borrowing rate was raised by 25 basis points to 4.0 percent, a level not seen since July 2012, and the SDA rate by the same amount to 2.50 percent. It was the second increase in the policy rate in as many meetings, and the first time the central bank adjusted both rates in one go.
"This is a preemptive move as far as second-round effects are concerned," Diwa Guinigundo, central bank deputy governor, told reporters.
"This is also contextualised in the global scenario where the U.S. might do an earlier-than-expected normalisation of its own monetary policy," he said, adding the rate increase will ensure economic growth will be more sustainable in the long run.
Southeast Asia's fifth-largest economy is among the fastest growing in the region after China, and the country's growth outlook remains robust, underpinned by exports and investments growing at a double-digit pace. While the Philippines is not at risk of overheating despite strong loan growth, the authorities have said they would adjust policy to contain price pressures.
The central bank raised its inflation estimates for 2014 to 2016 due to continued pressure on food prices from supply problems, and the looming power shortage in 2015 that could lead to a spike in energy costs.
It now expects average inflation this year to reach 4.5 from a previous estimate of 4.3 percent, and 3.8 percent in 2015 versus an earlier 3.7 percent forecast.
The estimates are above the midpoint of the central bank's 3-5 percent target this year and 2-4 percent target for 2015.
"We are approaching 2015 almost a full percentage point above the (inflation) target ... so it's natural for them to deliver a more aggressive pre-emptive rate hike," said Emilio Neri, chief economist at Bank of the Philippine Islands.
"If inflation decelerates fast enough in the fourth quarter, the BSP can pause until the second quarter next year," he said.
Consumer prices hovered at near three-year highs in August, while core inflation, which takes out volatile items in the consumer basket to measure the underlying trend in prices, climbed to a 17-month high last month.
MORE TIGHTENING?
Analysts said the central bank's tone had turned more hawkish than after previous meetings and the risk of further tightening could not be discounted.
"The statement reads fairly hawkish, so wouldn't be surprised to see another hike before year end," said Jonathan Cavenagh, senior FX strategist with Westpac in Singapore.
"It should help the PHP outperform," he added, referring to the peso which edged up after the announcement.
Other economists believed further tightening was likely as early as October, at the central bank's next meeting, with no respite in food price pressures.
ANZ said in a report food prices were expected to peak in October, putting upward pressure on inflation in the next two months. It also said the central bank was likely to raise anew its policy rate rather than the SDA rate which is more costly.
Guinigundo said the Bangko Sentral ng Pilipinas remained prepared "to take appropriate policy actions as necessary."
Inflationary pressures, however, were not so pressing for both Indonesia and New Zealand, with central banks there standing pat on interest rates on Thursday.
President Benigno Aquino this week assured the public the government was doing all it could to ease congestion at the Manila port to prevent the supply chain problem from pushing up food prices which have reached five-year highs.
The government is also rushing to boost thin stockpiles of rice after releasing more stocks in recent months to flood the local markets with cheap imported rice to bring down high retail prices of the national staple.
Most economists in a Reuters poll had expected the Bangko Sentral ng Pilipinas to tighten policy but were divided on which tools it would use.
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.
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