GRADUAL  TIGHTENING  OF  BANK  MONETARY  POLICY  SEEN

MANILA, JUNE 8, 2008
(STAR) By Des Ferriols - A top bank economist expects the central bank to gradually tighten its monetary policy setting this year, forecasting an increase in key policy rates by another 25 basis points in the next two policy meetings of the Monetary Board.

HSBC economist Frederic Neumann said over the weekend that monetary officials appear “increasingly hawkish” with inflation pressures likely to prove rather persistent.

“There is a significant upside risk to our own forecast of 7.7 percent for the current year, so officials look set to continue to hike interest rates in a gradual fashion,” Neumann said. “We now see a slight upside risk to our yearend policy rate forecast of 5.75 percent.”

According to Neumann, market concerns over spiralling inflation were reflected in the gradual depreciation of the peso and would further necessitate an active monetary policy response to rising price pressures.

Neumann said these concerns were made even more stark given the risk of rising import prices at a time of surging global commodity costs.

Conceding its 2008 inflation target, monetary officials said the inflation rate would also breach the 2009 target, prompting a 25-point increase in the key policy rates of the Bangko Sentral ng Pilipinas (BSP).

The BSP said it now expects the inflation rate to reach seven to nine percent in 2008 and four to six percent in 2009. This marks the first time the BSP has admitted that inflation rate would miss both the 2008 and 2009 targets set at three to five percent and 2.5 to 4.5 percent ,respectively.

Missing the 2009 target indicated that Thursday’s policy action would not be the last as the BSP grappled with rising commodity prices and the consequent adjustments in transport and wage rates.

The latest monetary policy action raised the overnight borrowing or reverse repurchase (RP) rate to 5.25 percent and the overnight lending or repurchase rate(RRP) to 7.25 percent.

The interest rates on term RRPs, RPs and special deposit accounts (SDAs) would also be adjusted accordingly, BSP Governor Amando Tetangco Jr. said.

The last time the BSP raised its key policy rates was in October 2005. Since then, its actions have been focused on managing monetary aggregates without having to touch its key policy rates.

“The Monetary Board believes that there are already indications that supply-driven pressures are beginning to feed into demand,” Tetangco said. He said core inflation as of May reached its highest level since April 2006 which meant that demand-side pressures were also building up.

“Given the early evidence of second-round effects, the MB recognized the need to act promptly to rein in inflationary expectations,” he said. “Since monetary policy affects economic variables with a time lag, policy measures undertaken now will help address risks to inflation in 2009.”

BSP deputy governor Diwa Guinigundo said their revised inflation projection for 2009 was based on the assumption the central bank would not be making any more policy action in the next 15 to 18 months.

Since the BSP is not changing its target for either 2008 or 2009, the language used by monetary officials indicated further tightening in monetary policy so that inflation rate could be brought back down to the target range.

Guinigundo also said the recent adjustment in minimum wages might not be the last, especially since the inflation rate was still heading upwards despite the recent drop in world oil prices.

According to Guinigundo, there were also petitions for yet another round of wage adjustments and even more petitions for transport fare adjustments in reaction to the dramatic increase in domestic pump prices.

“The adjustment in transport fares is yet another thing altogether and that has a direct impact on the prices of commodities that have to be moved to the markets,” Guinigundo said.

The market had expected the BSP to raise its policy rates by 25 to 50 basis points but Guinigundo said 50 basis points would have been too tight especially since inflationary pressures were still largely from the supply-side.


Chief News Editor: Sol Jose Vanzi

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