MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) currently does not see the need to raise interest rates despite claims that it, along with other Asian central banks, needs to be more proactive in addressing inflation.
Unlike regional counterparts which have begun tightening policy to address rising consumer prices, the Monetary Board last Feb. 10 decided to keep key rates unchanged, arguing that inflation remains manageable.
Some analysts said this indicated that rate hikes would only be implemented starting the second quarter. Last Wednesday , however, a senior HSBC economist urged that these be made as early as the next policy meeting on March 24.
Earlier in the week, meanwhile, Standard & Poor’s (S&P) issued a general warning that Asian central banks might need to act with dispatch to avoid stoking inflation expectations.
"For the next policy meeting, we will take into account all the developments that we have seen and that we will see between the last policy meeting and the next one," BSP Governor Amando M. Tetangco, Jr. told reporters last Thursday.
"So we’ll have to reassess the inflation outlook given the developments during this period and then come up with an overall evaluation of the price situation."
The Feb. 10 decision not to touch policy rates came as inflation rose to 3.5% in January from December’s 3%. The Monetary Board, however, raised its 2011 and 2012 inflation forecasts to 4.4% and 3.5%, respectively, from 3.6% and 3% previously.
The new outlooks remain within the BSP’s target inflation range of 3-5% for both years. Actual inflation averaged 3.8% last year, also within the 3.5-5.5% target.
"There are other factors that can affect the inflation forecast and then on that basis, we will make a decision on the policy interest rate. But right now, since we met only last week, the stance is still appropriate," Mr. Tetangco said.
He also claimed that the relatively small size of the BSP’s rate cuts -- a total of 200 basis points compared to 300-500 bps in other countries -- was another argument against an immediate tightening of policy.
The BSP’s overnight borrowing and lending rates were lowered to 4% and 6%, respectively, during the course of the global financial crisis and have been kept at those levels since July 2009.
"Our interest rates actually have remained positive in real terms," Mr. Tetangco said, reiterating a BSP argument that these have stayed ahead of inflation.
Asked to comment, University of the Philippines economist Benjamin E. Diokno said a tightening of policy was unlikely during the March 24 meeting.
Inflation data for February is scheduled to be released during the first week of March.
"My reading of the BSP’s statement is that it will not raise rates yet in the meeting in March. Rates were not really reduced significantly," Mr. Diokno said.
Earlier this week, HSBC senior economist Frederic Neumann said rate hikes would likely start in May but added: "We would like to see interest rates go up at the March meeting".
"I think the earlier, the better, especially since the Philippines is now the stand-out in the region [in terms of not having raised rates] ... To reassure markets, it might be prudent to act early," he said.
While the BSP has so far been successful in keeping inflation within target, it "must cement its inflation-fighting credibility. It has to reinforce that through a rate hike," Mr. Neumann said.
Debt watcher S&P, meanwhile, last Monday said in a report that inflation expectations could be kindled if Asian central banks tolerated the rise in prices and increased interest rates too gradually.
"The optimal policy mix to combat inflation is likely to be different in each economy," S&P said. "But we believe that monetary authorities can only succeed in taming inflation expectations if they show their willingness to tighten monetary conditions in a preemptive manner," it added.
The BSP, along with its Indonesian counterpart, was cited as among those which had delayed rate hikes to this year. Indonesia finally raised its benchmark rate last Feb. 4 .
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