* Second reserve requirement hike to mop up $1.4 bln from market
* BSP raises 2014, 2015 inflation forecasts
* Analysts expect rate hike in Q3
By Erik dela Cruz and Siegfrid Alegado
MANILA, May 8 The Philippine central bank kept its benchmark rate steady on Thursday but raised banks' reserve requirements for the second straight meeting, as expected, amid concerns that persistently high liquidity could stoke inflation.
The Bangko Sentral ng Pilipinas (BSP) also raised its inflation forecasts for this year and the next.
It now sees average inflation at 4.3 percent this year from 4.2 percent previously, and 3.4 percent for 2015 from 3.2 percent. Both remain within the BSP target of 3-5 percent this year and 2-4 percent for 2015.
Most analysts expect the central bank to raise its policy rate from a record low of 3.5 percent in the second half, in what would be its first rate hike in three years, to rein in inflation.
Prices could accelerate further later in the year, especially if expected drier weather due to the El Nino weather pattern hurts the country's farm output.
But the central bank may wait to see the impact of the reserve requirement increases before hiking its policy rate.
The reserve requirement hike of 1 percentage point, which takes effect on May 30, will siphon off an additional 60 billion pesos ($1.4 billion) from the financial system.
"The adjustments in the reserve requirements are expected to help mitigate potential risks to financial stability that could arise from the strong growth in domestic liquidity," BSP Governor Amando Tetangco told a media briefing, adding robust economic activity provided room for the hike.
The majority of economists polled by Reuters had expected the BSP to keep its overnight borrowing rate steady at a record low of 3.5 percent for the 12th meeting in a row this week. Only two had forecast a 25-basis-point (bps) hike.
Eight of the 15 economists had said the BSP could deliver another 1 percentage point hike in banks' reserve requirement to 20 percent, following a similar move in late March.
Three had flagged a possible 25 bps hike in the short-term Special Deposit Accounts (SDA) rate, which was also left unchanged on Thursday.
Some analysts expect the next policy move would be a rate increase in the third quarter, with price pressures likely to slowly intensify.
"Our sense is that around third quarter of this year if inflation hovers around 4.5 to 5 percent, they may do a preemptive hike on the policy rate, no longer just the RRR, to ensure that they meet the inflation target for 2015," said Emilio Neri, economist at the Bank of the Philippine Islands.
"They will try to probably be ahead of the curve," he said.
Annual inflation in April was slightly faster than expected at 4.1 percent, with prices of food and non-alcoholic drinks hitting their highest rate in nearly three years due to a shortage in local rice supply.
The peso is up just 0.4 percent this year, slowly recovering from a general retreat of funds from emerging markets. The stock market on the other hand, is up nearly 15 percent and is Southeast Asia's best performer as investors bet the economy would sustain its momentum this year.
The government expects the economy to expand by 6.5 to 7.5 percent in 2014, after growing 7.2 percent in 2013.
Money supply growth, at nearly 35 percent in March, continues to hover at record highs hit in January, worrying some market watchers.
But the BSP said it expects liquidity growth to decelerate to "normal" levels of 15-17 percent by midyear as policy measures, including the two reserve requirement hikes, take root.
Growth in bank lending of 20 percent in March was the highest in more than two years, with real estate lending also growing at 20 percent.
BSP Deputy Governor Diwa Guinigundo told reporters there was no evidence yet of asset bubbles in the property sector, with banks' exposure to the real estate market still at manageable levels.
He said last month authorities were closely watching developments in the sector, and could introduce a property price index to better monitor movements in the real estate market
"The real prices of property, whether commercial, industrial or residential, are way below levels in 1997 to 1998. In that sense we believe there is no evidence of overstretched valuations in the real estate market," Guinigundo said.
The Philippine property market suffered the worst beating in the region during the Asian financial crisis of 1997-1998.
"The exposure of the commercial banking system to real estate is something that we need to monitor but this is not the basis for saying that the exposure is already worrisome or there is already a possibility of an asset bubble," Guinigundo said.
($1 = 44.22 Philippine Pesos) (Writing by Rosemarie Francisco; Editing by Kim Coghill)