BSP to raise policy rates anew, say economists

Economists and analysts see the Bangko Sentral ng Pilipinas (BSP) raising interest rates next week to curb rising inflation spurred by continuing price increases in oil and commodities in the world market. Standard Chartered Bank economist Vincent Tsui said the BSP's Monetary Board would likely raise its policy rates by another 25 basis points on June 16 to keep inflation expectations well-anchored. The BSP on March 24 raised key interest rates by 25 basis points, and by another 25 basis points on May 5 to counter the continuing build-up on inflationary pressures. This brought the overnight borrowing rate to 4.5 percent and the overnight lending rate to 6.5 percent. Previously, the BSP managed to keep interest rates stable for 20 straight months from July 2009 to March 2011, due to a benign inflation outlook. "Although dissipating upside pressure on inflation gives BSP more flexibility in setting monetary policy, we believe inflation expectations are yet to be anchored and are still vulnerable to commodity-price volatility," Tsui said. He said the benign economic fundamentals following the slowdown in the country's first-quarter gross domestic product (GDP) to 4.9 percent from 7,3 percent a year earlier call for further increase in interest rates. "Meanwhile, benign fundamentals... suggest that a further normalization of monetary policy is required to contain overheating concerns, given that real policy rate remains close to zero," Tsui added. Continuing inflation Without rate increases, the inflation rate this year and next year will go beyond the BSP's targets, which could settle at 5.6 percent in 2011 and 4.2 percent in 2012. Tsui pointed out that inflation would likely peak at above 5 percent in July as a lower base and rising cost of services would keep consumer prices high in the latter part of the year. Economist Edward Teather of Swiss-owned UBS, meanwhile, said the slower economic growth continues to favor gradual adjustments in the BSP's monetary policy stance. "All this appears to support gradual policy tightening from the BSP," Teather said, adding that they see the central bank hiking interest rates by 50 more basis points over the next six months. "This will leave monetary policy settings fairly easy but could give some support to the currency as BSP rate hikes have lagged those elsewhere in the region as a result of hitherto benign inflation pressures," Teather added. — JMT/VS, GMA News