Central bank raises interest rates

March 27--AFTER holding its ground for almost two years, the Philippine central bank on Thursday decided to increase by a quarter of a percent its key interest rates amid "signs of stronger and broadening inflation pressures."

The Bangko Sentral ng Pilipinas' (BSP) policy-making Monetary Board raised by 25 basis points its overnight borrowing or reverse repurchase (RRP) rate to 4.25 percent and its overnight lending or repurchase (RP) rate to 6.25 percent.

The interest rates on terms RRPs, RPs and special deposit accounts were also raised accordingly.

BSP Governor Amando Tetangco Jr. said the decision also was based on the upward shift in the balance of risks to inflation.

He said international food and oil prices have continued to escalate due to the combination of sustained strong global demand and supply disruptions and constraints.

"Reflecting these, Philippine headline and core or underlying inflation have started to rise," Tetangco said.

The latest baseline inflation forecasts now indicate that the 3 percent to 5 percent inflation range in 2011 could be at risk, the BSP said.

"Given these developments, the Monetary Board decided to act promptly to rein in inflation expectations. The Board believes that a preemptive response will minimize the overall impact of rising inflation on domestic economic activity by helping to firmly anchor the public's inflation expectations," Tetangco said.

He said well-anchored inflation expectations would safeguard price stability and preserve the public's purchasing power.

"Buoyant domestic demand conditions provide room for a policy interest hike without affecting the country's economic growth prospects," the BSP chief said.

Monetary authorities said they would closely watch the evolving global situation, focusing on the macroeconomic risks of protracted political tensions in the Middle East and North African region, as well as the growth and inflation implications of the recent disasters in Japan, where events continue to unfold.

"The Monetary Board will remain vigilant against emerging inflationary risks and possible second-round effects of commodity price pressures. The Board stands ready to undertake further action as necessary to safeguard price stability," Tetangco said.

The central bank said any adjustment would be done in a gradual manner and will depend on its reading of the inflation outlook.

Deputy Gov. Diwa Guinigundo said inflation may go beyond the 4.4 forecast the BSP made in February 10, but maintained that the average figure would still fall within the 3-percent to 5-percent target.

The BSP raised its estimate for the average crude oil cost this year to within $100 to $110 per barrel from a previous assumption of $90 to $100 per barrel. The higher projection took into account the tension in the Middles East, as well as Japan's disaster and how it would affect global commodity prices.

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