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BSP warns of more hikes to contain high inflation

07/24/2008

The inflation rate is expected to climb higher to 12 percent from 11.4 percent in June which may force the Bangko Sentral ng Pilipinas (BSP) to hike interest rates again, BSP Gov. Amando Tetangco said yesterday.

“Inflation could peak at 12 percent on a year-to-year basis for certain months,” he told a media briefing.

He said average inflation for 2008 would still be about nine to 11 percent and six to eight percent in 2009.

Inflation rose to 11.4 percent in June, the highest level in 14 years, due to rising food and energy prices.

The BSP had raised its key interest rates by 75 basis points since June to try and dampen the price rises.

Tetangco said promoting price stability remained the central bank’s main focus, and further “interest rate hikes cannot be ruled out at this point.”

But he said the food situation had eased in recent months and that the rise in oil prices was already slowing down due to lower global consumption and demand.

Despite the problems, economic growth in 2008 is still forecast at 5.7 to 6.6 percent, he said.

Tetangco also told reporters that he did not expect to see more monthly balance of payments (BoP) deficits after a $248 million shortfall in June despite the pinch of rising imports costs.

“Given the current inflation environment, and given that there are still risks to the outlook, interest rate hikes cannot be ruled out at this point,” he said.

Tetangco said the BSP’s focus is to re-establish a lower inflation environment.

“If not, then the cost to the economy of prolonged high inflation would be even higher, so we have to act now,” Tetangco told the Foreign Correspondents Association of the Philippines yesterday.

The monetary authority raised rates by an aggressive 50 basis points last week to rein in inflation.

Tetangco also said any effect of higher rates on economic growth was not a major factor.

“The demand conditions in the economy continue to be buoyant,” he said “The impact of these policy moves by the central bank...on output is not going to be that large,” he said.

He added the price spikes are taking longer than expected.

“No one, not even the rating agencies, or the IMF or any entity that is now characterizing the action of central banks in Asia as being behind the curve, anticipated the virulence and the length of the price spikes in oil and food,” he said.