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BSP increases key interest rates |
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By LEE. CHIPONGIAN
The Manila Bulletin 04/08/2005 To curb inflationary pressures, the Monetary Board, policy-making arm of the Bangko Sentral ng Pilipinas, yesterday raised key policy rates by 25 basis points to 7.0 for overnight borrowing and 9.25 percent for overnight lending or repurchase. The last adjustment wherein the MB lowered the rates was in July, 2003. BSP Deputy Governor Amando M. Tetangco Jr. said the main driver of inflation or consumer prices is still supply-side. "There are some demand pressures that are beginning to emerge but these are still limited," he said. Tetangco added that the rates were increased to "manage inflation," which they see as on the upside trend. "This is a signal," he said. In March, inflation hit 8.5 percent, still on oil price movements. In a statement the MB "emphasized that the increase in the BSP’s policy interest rates is chiefly a preemptive move to prevent inflation expectations from spiraling away from the inflation target." That the policy action is intended as a response to rising inflation expectations, and underlines the BSP’s commitment to fighting inflation. The MB said it decided to increase the BSP’s policy interest rates by 25 basis points since in its assessment of the outlook for inflation and output, demand-driven inflationary pressures remain limited at present given fairly high unemployment, modest credit growth, and spare capacity in manufacturing. "At the same time, the latest forecasts continue to show headline inflation declining towards the 4-5 percent target by 2006," the BSP said. However, according to the central bank, "the upside risks to the inflation outlook have increased given prevailing expectations for international oil prices, which are expected to remain high for the foreseeable future. In addition, recent supply-side developments—particularly the increases in oil prices—may already be feeding into inflation expectations." The prospect of renewed cost-push pressures from rising oil prices and other supply-side factors, combined with falling real wages and rising inflation expectations implies a "greater risk that the public will come to expect future inflation to continue to spiral away from the government’s target." These changes in inflation expectations have an impact on overall price- and wage-setting behavior in the economy. Under these circumstances, the MB believes that a measured increase in policy interest rates can help prevent rising inflationary expectations from becoming widespread and entrenched and prevent ongoing supply shocks from generating second-round effects. The MB also "noted other risks to future prices." The BSP said cited exchange market pressure, which remains as a risk to inflation expectations, given the likelihood of declining interest rate differentials and possible adverse shifts in investor sentiment due to delays in needed tax measures. "Recent increases in liquidity growth due to external inflows are also being monitored closely, because of the potential implications of the additional liquidity for exchange market stability and the inflation path." |
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