Thursday May 05, 2011 06:08:00 EDT
The Philippine central bank on Thursday decided to raise its benchmark interest rate for a second straight rate-setting session as surging global oil prices continued to put upward pressure on domestic inflation. Rising inflation expectations also pose a key risk to the bank's inflation target.
Bangko Sentral ng Pilipinas lifted the interest rate for the overnight borrowing or reverse repurchase facility by 25 basis points to 4.5 percent. The decision was in line with expectations. The rate for overnight lending or repurchase facility was also lifted by a quarter point to 6.5 percent.
The Monetary Board noted that the latest baseline inflation forecasts continue to suggest that the 3-5 percent inflation target for 2011 remains at risk, mainly as a result of expected pressures from oil prices.
Inflation in the Philippines climbed to one-year high of 4.5 percent in April, according to figures released today by the National Statistics Office. The increase was driven by rising food and energy costs.
In March, inflation was 4.3 percent. The core inflation, that excludes selected food and energy items, rose to 3.8 percent in April from 3.5 percent in March.
The central bank also expressed concern over the upward shift in the public's inflation expectations. The monetary board expects sustained price pressures and higher inflationary expectations to influence future wage and price outcomes.
"With these considerations, the board deemed it prudent to rein in inflation expectations further and contain second-round effects with a follow-through policy action," the bank said in the statement.
Central bank governor Amando Tetangco had reportedly warned against rising inflation expectations as early as in March and said that the scope for keeping interest rates unchanged has "narrowed."
In its latest global outlook report released in April, the International Monetary Fund raised this year's inflation forecast to 4.9 percent from 3.9 percent projected in March.
The central bank observed that careful attention is warranted to ensure that the sustained strong foreign capital inflows, along with rising domestic liquidity and credit, do not exacerbate domestic liquidity levels and fan inflationary pressures in the future.
The rate-setting body expects the economy to maintain above trend growth going forward. Capacity utilization of the manufacturing sector has remained consistently above 80 percent, while lending for production activities continued to expand, indicating sustained pick-up in private investment.
The Monetary Board said that it remains prepared to take appropriate actions necessary to ensure the achievement of the central bank's price stability objective.
The Philippine economy expanded 7.3% last year, the strongest pace recorded since democracy returned to the country in 1986. In the fourth quarter of last year alone, the gross domestic product was up 7.1 percent from the same period a year ago. The IMF forecast the economy to grow 5 percent in 2011.