Monetary Board raises key interest rates by 25 basis points Thursday

(Updated 7:16 p.m.) The policy-setting Monetary Board on Thursday raised the Philippines' benchmark interest rates by 25 basis points, the first rate adjustment since July 2009, as a way of managing inflation. The move brought the overnight borrowing rate to 4.25 percent and the overnight lending rate to 6.25 percent. The policy-setting Monetary Board on Thursday raised the Philippines benchmark interest rates by 25 basis points, the first rate adjustment since July 2009, as a way of managing inflation. The move brought the overnight borrowing rate to 4.25% and the overnight lending rate to 6.25%. The decision “was based on signs of stronger and broadening inflation pressures," Bangko Sentral ng Pilipinas (BSP) Gov. Amando Tetangco Jr., who chairs the seven-man board, told reporters during a briefing after Thursday’s policy meeting. He said the country’s inflation, both headline and core, started to rise early this year in tandem with the escalation in global food and oil prices because of supply-and-demand disruptions and constraints. The central bank’s latest inflation target of 3 percent to 5 percent this year is now at risk, the BSP chief said. In February, inflation accelerated to a nine-month high of 4.3 percent, from 3.6 percent in January. "The Monetary Board decided to act promptly to curb inflation expectations… A preemptive response will minimize the overall impact of rising inflation on domestic economic activity," Tetangco said. A well-anchored expectation would safeguard price stability and preserve the public's purchasing power, he explained. The resilient economy could absorb the 25 basis points, according to the central bank chief. "The policy-interest-rate hike would not affect the country’s economic growth prospects." Having to act decisively BSP Deputy Gov. Diwa Guinigundo said the rate hike will help the central bank keep its inflation forecast of 3 percent to 5 percent. Without a policy rate adjustment, the central bank would have to expand it inflation target to 5.18 percent, especially if inflation accelerates to 4.24 percent this March. With the ongoing unrest in the Middle East and North Africa, Philippine monetary authorities have raised their oil price forecasts ranging from $100 to $110 per barrel this year, from an earlier target of $85 to $95. Brent crude was trading at $115.35 a barrel Thursday, according to a Reuters report from Singapore. Higher oil prices convey "second round effects" with the clamor for higher wages and higher transport fares, according to the deputy governor. The central bank "does not respond to supply shocks, but if the effects are prolonged, we have to act decisively," he said. Providing market confidence The decision will likely spur a positive response from the market, instead of dampening sentiments, Guinigundo said when asked if higher interest rates will curtail economic activity. “On the contrary, it will provide confidence in the market that the BSP is serious in providing price stability." "The Monetary Board will remain vigilant against emerging inflationary risks… We stand ready to undertake further action as necessary to safeguard price stability," Tetangco said. Earlier, the BSP chief said any interest rate adjustment would be gradual to ensure that inflation will be “well-anchored" amid surging global oil and food prices. The Monetary Board pegged the overnight borrowing and lending rates at 4 and 6 percent, respectively, since July 2009, to shield the Philippine from the impact of the global recession. Until Thursday’s rate adjustment, the Philippines was the only economy in Asia-Pacific that did not raise interest rates since the global recession subsided. — VS/JV/PE/JE, GMA News Online