BSP to review policy if inflation spreads

The Bangko Sentral ng Pilipinas (BSP) said yesterday it would review its monetary policy stance and possibly raise rates if inflationary pressures were to spread, particularly from wage increases.

“Let’s say there’s (a) second round effect, then we will have to review our monetary policy stance and see if there’s a need to tighten,” BSP Governor Amando Tetangco Jr. told reporters.

The BSP is widely expected to keep interest rates steady at a meeting today  because it has repeatedly said monetary policy is not a suitable tool to deal with rising oil and other commodity prices, which have boosted inflation.

In a report, the Development Bank of Singapore (DBS) said the BSP is likely to keep policy rates unchanged at its meeting today.

‘’The BSP meets Thursday and is likely to leave the overnight reverse repo and repo rates (borrowing and lending rates) unchaged at five percent and seven percent, respectively,’’ the DBS said.

But Tetangco told reporters the monetary board is closely monitoring calls by labor groups for a rise in private workers’ minimum wages, which signal a spreading of inflationary pressure beyond supply factors.

“It (a wage increase) is still under discussion. Once it’s approved and implemented, that’s when (we review),” Tetangco said.

Regional wage boards are meeting on Friday to discuss raising salaries of workers who are facing rising costs for rice, fuel and other basic commodities.

In Manila, it normally takes between 30-45 days to agree wage increases.

Annual inflation in March hit a 21-month high of 6.4 percent, mainly due to a surge in rice costs and far above the BSP’s  inflation target for the year of three to five  percent.

Inflation last year averaged 2.8 percent, the lowest since 1986, partly due to a 19 percent rise in the peso against the dollar, which countered imported inflation. But so far this year, the peso is down around 1.6 percent.

Meanwhile, the market has been speculating that the BSP would next adjust its reserve requirements when the Monetary Board meets today but central bank officials brushed these aside.

BSP Deputy Governor Diwa Guinigundo told reporters that while it was true that the BSP was reviewing its reserve requirements, the possible adjustments would not be implemented as part of a monetary policy action.

At present, the BSP requires banks to set aside 10 percent of deposits as liquidity reserve and another 11 percent as statutory reserve. In effect, Guinigundo said banks could only use and relend 80 centavos of every P1 deposited with them.

“That means that instead of being able to earn the 10 to 11 percent interest on bank loans, banks are only earning the four percent that the BSP is paying for the funds set aside as reserves,” Guinigundo said. — Des Ferriols