Inflation fears prompt BSP to keep rates steady

The Monetary Board (MB), the policy-making body of the Bangko Sentral ng Pilipinas (BSP), has kept its key rates unchanged on concerns inflation levels could go up.

The MB maintained the overnight borrowing and lending rates at nine percent and 11.25 percent, respectively.

In a statement, the MB said that while inflation in the first five months has been stable, "certain upside risks remain."

There are concerns the inflation level could be on the upswing, especially with the depreciation of the peso against the dollar.

Aside from tracking regional currencies, the peso this week has been weakening, pulled down by the crisis in Mindanao triggered by the unresolved Abu Sayyaf kidnapping.

Moreover, oil companies are planning to raise oil prices anew by about 90 centavos per liter which is feared to trigger a rise in prices of consumer items.

In a statement, the MB said: The board believes that the more prudent stance in the meantime would be to closely watch the movements of the factors that bear on the inflation outlook – particularly the trend in energy prices, the level of liquidity in the system, interest rate differentials and other indicators of demand and supply, along with the growth path of the economy."

BSP Deputy Governor Armando Suratos said the peso's weakness is temporary and is mainly due to the Abu Sayyaf problem.

"We hope the foreign exchange rate will improve soon. Government is already exerting all means to resolve the hostage/kidnapping crisis," Suratos said, adding that the MB is waiting for the next move of the US Federal Reserve Committee which is expected to further cut it own key rates by at least 25 basis points.

"We are waiting for the US Fed action before we make our own move," Suratos said.

Earlier, BSP Governor Rafael Buenaventura said the central bank is monitoring the movement of inflation given the volatile peso-dollar exchange rate market.

Buenaventura said that while the inflation level for May which at 6.5 percent is lower than the forecast of 6.7 percent, provides scope for further monetary easing, this hardly constituted a trend. He said the board wanted more time to see if the inflation level can be kept or sustained for a longer period.

The BSP which wants to keep a low-interest rate regime to spur economic activities that hopefully would boost economic recovery efforts, has trimmed overnight borrowing and lending rates by a total of 600 basis points since December last year.

Meanwhile, Suratos said the BSP has not intervened to support the peso in the past two days. "No, we did not. We did not at all. We did not use a single dollar of our national reserves." Suratos added that the central bank did not intervene yesterday or the day before.

The peso has been under pressure from the ongoing hostage crisis in Basilan. The currency was quoted at 51.29-51.325 just before midday break on the local dealing system, against Wednesday’s close of P51.31.

"The kidnapping and the hostage crisis is a factor, but I don’t think there will be further depreciation," Suratos said.