UBS: Central bank likely to tweak policy rates by Q2

The Bangko Sentral ng Pilipinas (BSP) will likely tweak its key policy rates starting the second quarter of 2011 as inflation may average 4.1 percent this year and 4.6 percent in the next, Swiss-owned investment bank UBS said Friday. The central bank may adjust upwards the overnight borrowing and lending rates as average inflation would pick up this year from 3.8 percent last year, UBS economist Edward Teather said in a report titled "Philippines: The end to downside inflation surprises?" Since July 2009, the Monetary Board has placed the overnight borrowing and lending rates at 4 and 6 percent, respectively. "Administered and other price increases, some arguably delayed from last year, suggest inflation momentum and inflation surprises may shift to the upside," Teather wrote. "This may hasten the start [of] policy normalization, but we do not expect a serious shock to growth as inflation expectations are not elevated, balance sheets are strong, and credit growth moderate," he continued. Inflationary surprises usually happen when there is a confluence of price increases in petroleum, toll rate, basic commodities, and electricity, Teather explained. The BSP projected the country's inflation at 3.6 percent for 2011 and 3 percent for 2012 — lower than the UBS projections. Philippine inflation would land somewhere between 3 and 5 percent from 2011 to 2014, according to the UBS. 100 basis points The central bank, Teather said, will likely increase its key policy rates by 100 basis points starting the second quarter of the year. "We doubt [that] the BSP will allow itself to fall behind the curve and project policy rate increases of 100 basis points this year," he said. BSP Gov. Amando Tetangco Jr. described 2011 as a promising and critical year as it marks the beginning of a new decade. The country's economic growth gains traction while advanced economies such as the US and Europe continue to struggle, Tetangco explained. "2011 for me is a year of promise. The worst effects of the global economic and financial crisis are now behind us," he pointed out. Tetangco cited the country's manageable inflation environment, healthy credit growth, favorable external payments dynamics, and quality improvements in the financial system. "2011 is the beginning of a new decade. It is also a critical year that could spell whether we would be able to press on the road to sustained strong recovery," he added. Reforms Tetangco said the monetary policy and banking regulatory reforms need to address global risks, like the uneven growth rates and capital flows among developing and developed nations. The shift in investor preferences could define the direction and strength of capital flows that would affect prices of financial assets, he added. "Prudent monetary policy contributed to price stability," according to Tetangco. — JE/OMG, GMANews.TV