27th March 2014
The central bank of the Philippines maintained its policy rate at 3.50 percent, along with its other rates, but raised the reserve requirement by one percentage point and said “it will consider further adjustments in its policy tools to safeguard price and financial stability.”
Bangko Sentral ng Pilipinas (BSP), which has kept its benchmark overnight borrowing rate steady since October 2012, said the reserve requirement was raised to “guard against the potential risks to financial stability that could arise from continued strong liquidity growth and rapid credit expansion.”
The bank said it held its main rate steady because the the path of inflation is likely to remain within the central bank’s target ranges of in 2014 and 2015 but “buoyant domestic growth prospects allow some scope for a measured adjustment in the BSP’s policy instruments amid the ongoing normalization of monetary policy overseas.”
The central bank – which targets inflation this year of 4.0 percent, plus/minus one percentage point, and 2015 inflation of 3.0 percent, plus/minus one percentage point – said inflation expectations were broadly aligned with the target though “the balance of risks to the inflation outlook continue to be skewed to the upside, with potential price pressures emanating form pending petitions for adjustments in utility rates and from the possible increases in food and oil prices.”
Financial markets had been expecting the Philippine central bank to start tightening its policy after the central bank governor last week told reporters that an early and gradual adjustment of monetary policy rather than discreet movements would be less disruptive to businesses.
Inflation in the Philippines eased slightly to 4.1 percent in February from January’s 4.2 percent but started accelerating in September due to higher food prices from adverse weather.
Last month the BSP also said the risks to the inflation outlook were “slightly weighted” to the upside but also described inflation as manageable.
The country’s Gross Domestic Product rose by 1.5 percent in the fourth quarter from the third quarter for annual growth of 6.5 percent, down from 6.9 percent in the third quarter.
Earlier this week, two banks said they expected the BSP to raise either the 2.0 percent rate on its Special Deposit Account (SDA) or the 18 percent reserve requirement. Last year the central bank cut the SDA rate three times by a total of 150 basis points to reduce the inflow of foreign capital to and divert the funds to more productive economic use