By Cecil Morella
MANILA, March 24, 2011 (AFP) – The Philippines on Thursday raised interest rates for the first time in almost two years, joining its Asian neighbors in a battle to keep inflation in check, while analysts warned of more hikes to come.
The central bank said strong global demand and supply disruptions for oil and food due to political unrest, as well as the quake and tsunami disaster in Japan, had tipped the balance of risks.
Overnight rates, which have been kept at record-lows since July 2009, were raised 25 basis points to 4.25 percent for borrowing and 6.25 percent for lending.
“The latest baseline inflation forecasts now indicate that the 3-5 percent inflation target range in 2011 could be at risk,” the Monetary Board said in a statement after its monthly meeting.
“The Monetary Board believes that a preemptive response will minimize the overall impact of rising inflation on domestic economic activity by helping to firmly anchor the publicâ€™s inflation expectations,” it added.
Without the rate hike, central bank deputy governor Diwa Guinigundo estimated that inflation could average 5.18 percent this year, according to Dow Jones Newswires.
Rising inflation has become a key concern for governments around Asia, which had been pursuing expansionary monetary policy to ward off the worst of the 2008 global crisis.
India, South Korea, Thailand and Vietnam all raised interest rates this month with both Hanoi, battling double-digit inflation, and New Delhi pledging further tightening.
China has pledged to keep prices in check after announcing earlier this month that inflation in the world’s second-largest economy had remained stubbornly high at 4.9 percent in February.
Filipino monetary officials said prolonged tensions in the Middle East and North Africa and the fallout from the twin disasters in Japan posed the main risks in a still unfolding situation.
“The Board stands ready to undertake further action as necessary to safeguard price stability,” the central bank statement added.
Prices surged 4.3 percent in February from 3.5 percent in January, previous government data show, while inflation averaged 3.8 percent last year.
Analysts polled by Dow Jones Newswires predicted further monetary tightening by Manila.
“Another hike in May is on the cards,” said Radhika Rao, an economist at Forecast Singapore, according to Dow Jones.
“As we mentioned earlier, these measured moves are not ‘aggressive’ tightening per se but mark a calibrated move towards rate normalization as current rate-settings ran the risk of looking outdated given prevailing risks.”
Vincent Tsui, an economist at HSBC, said persistent inflation pressure and the need to normalize real interest rates should nudge the Philippine central bank to raise policy rates by 25 basis points in the second and third quarters.
Manila possibly needed another 50 basis points hike in the fourth quarter, Tsui said, according to Dow Jones Newswires.
David Cohen, economist at Action Economics, agreed that the central bank will likely raise rates three more times this year, each by 25 basis points, Dow Jones said.
“This would parallel a similar tightening of interest rates expected during upcoming quarters by central banks across the region,” Cohen said.