BSP jacks up policy rates anew by 25 pts

By Ruben Hortelano

08/29/2008

The policy-making Monetary Board raised interest rates by 25 basis points yesterday in an effort to blunt the impact of high prices on the economy.

The decision pushed the overnight borrowing rate to 6 percent and the overnight lending rate to 8 percent.

“The economy is strong enough to withstand a 25 basis points rate increase,” Bangko Sentral ng Pilipinas (BSP) Deputy Gov. Diwa Guinigundo told reporters.

“I think the economy can manage a growth above five percent this year,” he added.

The BSP began raising key overnight rates in June, reversing a previous policy of easing monetary controls.

BSP officials said they expect domestic inflation to hit between 11.8 and 12.6 percent in August in the face of higher food prices and supply bottlenecks caused by recent typhoons.

The decision to hike the key overnight rates came hours after the government announced that economic growth in the second quarter of the year slowed to 4.6 percent.

“In its assessment, the Monetary Board recognized that further measured tightening of monetary policy was necessary given the latest forecasts indicating above-target inflation for both 2008 and 2009,” BSP Gov. Amando Tetangco Jr. said.

“Monetary policy needs to be appropriately tight to stabilize inflation to within the target range over the policy horizon, and to help manage inflation expectations,” he added.

The third time rate adjustments effectively limits the amount of money circulating in the system and should help blunt supply-side pressures that have pushed inflation, at 12.2 percent in July, to a 17-year high.

Tetangco said fluctuations in international oil prices continue to pose a major risk to the inflation outlook.

The BSP anticipates inflation to range from 9 percent up to 11 percent this year, way above the 3 percent to 5 percent target.

For August, inflation should range as low as 11.8 percent up to only 12.6 percent, according to Tetangco.

Guinigundo, gave the assurance the price survey in August, due next week, should reveal inflation “below 13 percent” as inflation was seen to peak in October yet.

Tetangco also said more recent appreciation of the inflation outlook has started to reflect the recent easing in global food and oil prices.

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