Interest rates kept steady despite inflation hike

The Bangko Sentral ng Pilipinas kept interest rates at record lows over the weekend and made clear it was in no rush to raise them, playing down last month’s spike in inflation and price risks stemming from recent typhoons.
The central bank lifted its inflation forecasts for this year and next, but said they still remained within its target ranges and that inflation expectations were well anchored.
Analysts took the comments as a sign that the central bank will hold off with any rate increases at least until the first quarter of next year. However, they expect a gradual build up in price pressures and a pick-up in growth will prompt the central bank to start raising rates by mid-2010.
“On the supply side, price pressures from crop losses due to the recent calamities are not expected to have a significant long-lasting impact on inflation,” central bank Governor Amando Tetangco said in a statement, after the bank kept the overnight borrowing rate at 4.0 percent, unchanged since July.
“With such flexibility, the board also believes that keeping the policy rates steady will help support domestic demand, including the reconstruction efforts of the government and economic activity in the near term,” he said.
Three strong typhoons in a space of five weeks have hit the main rice and coconut growing regions in northern Philippines.
Annual inflation jumped to 1.6 percent in October from 0.7 percent in September, its highest since May, but remained within market and central bank estimates, and monetary authorities played down the data as a temporary spike.
The central bank forecast average inflation at 3.28 percent this year and 4.02 percent in 2010, slightly above earlier estimates, the central bank said.
“I think the inflation assessment is realistic given the regulatory environment,” said Joey Cuyegkeng at ING Bank in Manila. “M3 growth is well managed and moderate and demand pressures from liquidity are pretty muted. That will offset some of the price pressures.”
Philippine 1-year bonds on Thursday were at 4.74 percent, off three-month highs of 4.78 percent struck this week with no surprises from the October inflation data. The policy rate decision was announced after the market closed.
The central bank had cut its benchmark rates by a total 200 basis points within an eight-month period ending August to soften the blow of the global recession on the local economy.