Moody's unit sees BSP raising rates by yearend

MANILA, Philippines - Moody’s Analytics Inc., a division of New York-based credit rating firm Moody’s Corp., said it expects the Philippine central bank to raise interest rates towards the end of the year due to inflationary pressures brought about by strong economic growth.

Katrina Ell, an economist from Moody’s Analytics, said risks of inflation are tilted on the upside due to volatile oil prices in the world market as well as the stronger-than-expected economic growth in the first quarter of the year.

“We expect the central bank to resume tightening rates in the latter part of 2012, bringing the policy rate out of accommodative territory,” Ell stressed.

The Bangko Sentral ng Pilipinas (BSP) has so far slashed interest rates by 50 basis points due to benign inflation outlook as well as fragile global economy and to accommodate stronger economic growth.

The central bank’s Monetary Board reduced interest rates by 25 basis points last Jan. 19 and by another 25 basis points last March 1 bringing the overnight borrowing rate back to a record low of four percent and the overnight lending rate to six percent.

The body decided to keep policy rates steady last April 19 to assess the impact of the earlier rate cuts on the domestic economy. The next policy rate setting meeting of the BSP is scheduled on June 14.

The Philippines posted the fastest gross domestic product (GDP) growth in Southeast Asia with 6.4 percent in the first quarter of the year. This was faster that the revised four percent expansion booked in the fourth quarter of last year and the projected 5.2 percent for the first quarter.

The GDP growth of the Philippines was faster that Indonesia’s 6.3 percent, Vietnam’s four percent, Singapore’s 1.6 percent, and Thailand’s 0.3 percent but slower than China’s 8.1 percent expansion in the first quarter of the year.

Amid the strong growth, the BSP managed to keep inflation at bay at three percent in the first five months of the year as consumer prices slightly eased to 2.9 percent in May from three percent in April. The central bank has set an inflation target of three percent to five percent this year.

“A rise in domestic food supplies has helped to cool inflation to within the BSP target range of three percent to five percent,” Ell said.

However, she warned that global oil prices have remained volatile and could resume an upwards climb that could drive supply-side pressures while the strong GDP growth in the first quarter would add to demand_side pressures.

Moody’s Analytics earlier upgraded the country’s GDP growth forecast to 4.7 percent instead of four percent this year after a stronger-than-expected economic expansion in the first quarter of the year.