* BSP keeps policy rate steady, as widely expected
* Raises banks' reserve requirements by 1 percentage point
* Central bank slightly lowers inflation estimates for 2014,
By Erik dela Cruz and Siegfrid Alegado
MANILA, March 27 The Philippine central bank
left its policy rate steady on Thursday, as expected, after it
lowered its inflation outlook but analysts say tightening is on
the cards as growth stays resilient and with possible upside
risks to prices.
Strong imports of capital goods and buoyant investment
growth in the Southeast Asian country at a time when the peso
is weaker will likely keep the central bank in a
The Bangko Sentral ng Pilipinas (BSP) kept its overnight
borrowing rate at a record low of 3.5 percent for the 11th
straight meeting. It also left the rate on its short-term
special deposit account (SDA) window unchanged, but raised
banks' reserve requirement ratio (RRR) by 1 percentage point to
"Raising the RRR should start to weigh on money supply and
work to contain inflation pressures. Hence, some of the detail
is hawkish," said Jonathan Cavenagh, senior FX strategist with
Westpac in Singapore.
The decision came after the central bank slightly lowered
its inflation estimates for this year and next, saying the
outlook was within target although there are upside risks from
possible increases in utility, food and oil prices.
Gradual tightening in money conditions points to an increase
in the country's key policy rate soon to further rein in cost
pressures. Some analysts say the central bank may raise the
benchmark rate as early as its next policy review in May.
Comments from central bank Governor Amando Tetangco in
recent days pointing to an early and gradual policy adjustment,
also suggest a firming in rates was not far off.
Ten out of 12 analysts polled by Reuters had expected the
policy rate to be kept on hold at 3.5 percent. The
two dissenters forecast a 25-basis-point hike in the policy and
SDA rates, saying the move was needed to keep a lid on liquidity
growth which hit a record high in January.
Tetangco had said last week "measured" adjustments were
needed even as he expected inflation to remain within target. He
added policy adjustments may involve key interest rates and
other tools, but he did not give details.
The central bank slightly lowered its 2014 average inflation
estimate to 4.2 percent from 4.3 percent. It also lowered its
forecast for 2015 inflation to 3.2 percent from 3.3 percent.
Both remain within policymakers' comfort zone.
MOPS UP LIQUIDITY
Some economists had expected the central bank to first mop
up excess liquidity via higher bank reserve requirements, which
go into effect on April 4, before increasing interest rates.
"BSP, while keeping rates unchanged at its last meeting as
it had telegraphed to the market, has turned more hawkish. As
such, it wasn't entirely surprising, although raising RRR by a
full percentage constitutes more a normalisation than
tightening," said Andy Ji, Asian currency strategist for
Commonwealth Bank of Australia in Singapore.
He said BSP was likely to raise rates as early as the next
meeting as RRR was back in neutral, while both nominal and real
rates were still accommodative relative to historical levels.
Money supply growth in January hit a record high of 38.6
percent. But the central bank said it expects growth to
decelerate to 15 to 17 percent by the middle of the year, as the
market fully absorbs revisions in the SDA facility last year and
banks lend more.
About a trillion pesos ($22 billion) went out of the SDA
facility, a short-term liquidity window, after the central bank
lowered rates and limited access by trust departments to the
facility last year.
Strong liquidity, analysts have warned, could fan inflation,
which has stayed above the mid-point of the central bank's 3-5
percent target for the third month in a row in February.
Tighter policy may lend support to the peso hit by emerging
market ructions, in spite of the Philippines' growth prospects.
The peso has fallen about 1.3 percent against the dollar
since the start of the year.
On Wednesday, the International Monetary Fund said the
Philippine economy would grow faster this year than it earlier
expected, driven largely by reconstruction spending after a
deadly super typhoon in November.
(Additional reporting by Cheong Jong Woo in SINGAPORE; Writing
by Rosemarie Francisco; Editing by Jacqueline Wong)