BSP to raise key rates on inflation, says UK bank

(Updated 5:15 pm) Philippine inflation will exceed 5 percent this year on rising global commodity prices, forcing the Bangko Sentral ng Pilipinas to raise key interest rates by 125 basis points, United Kingdom-based Standard Chartered Bank said Tuesday. The bank’s head of research, Nicolas Kwan, said in a press conference that the BSP would start raising its key policy rates by March. Other central banks in the region already raised its interest rates, he said. "We need to tigthen. We need to raise rates and next month you will see the BSP starting to raise its rates," Standard Chartered’s research chief said. Inflation would likely average between 4.5 percent and 4.8 percent this year, but it could exceed 5 percent on rising global commodity prices, Kwan told reporters. The Bangko Sentral’s Monetary Board gradually lowered its policy rates by 200 basis points from December 2008 to July 2009 to shield the economy from the global financial crisis. The overnight borrowing rates was lowered to a record 4 percent and the overnight lending rate to 6 percent. The next Monetary Board policy-setting meeting is March 24. ‘As oil and food prices go up’ Philippine inflation last month rose to 3.5 percent — a four-month high — from 3 percent in December. Average inflation climbed to 3.8 percent last year from 3.2 percent in 2009. The Philippines is one of the few countries in the region with a positive real policy rates, as interest rates remain higher than inflation. "Inflation is relatively mild at this point but it will trend up in the coming months as oil and food prices go up," Kwan said. Monetary authorities should not wait for inflation to further kick up before adjusting its policy rates, he said. "We are not the central bank and we do not recommend to the central bank. But when the BSP holds rates for a long time, they may be perceived as being behind the curve," Kwan explained. In trying to track how the Bangko Sentral would approach the situation, Kwan said it would raise key policy rates by 25 basis points per quarter but it may have to raise by 50 basis points in one quarter to bring the overnight borrowing rate to 5.25 percent this year from 4 percent. "If they do it abruptly, they may have to increase the rates two to three times. But if they do it gradually, they have to raise the rates three to four times this year," the chief researcher said. On Feb.4, the Monetary Board decided to keep policy rates unchanged but raised its inflation forecasts for this year and next amid soaring oil and commodity prices higher power and water rates. The Bangko Sentral raised its original forecast to 4.4 percent from 3.6 percent this year and to 3.5 percent from 3 percent for 2012, saying the numbers would fall within the target range of 3 percent to 5 percent between this year and 2014. — VS, GMA News