The Philippine central bank kept its key policy rate at 3.50 percent, as expected, but again tightened its policy stance by raising the Special Deposit Account (SDA) rate by 25 basis points to 2.25 percent and warned that it "stands ready to undertake further policy actions as necessary to safeguard price and financial stability."
Bangko Sentral ng Pilipinas (BSP) has kept its benchmark overnight borrowing rate steady since October 2012 but raised its reserve requirements in March and May by a total of 200 basis points to reduce the risks to inflation and financial stability from ample liquidity.
"The Monetary Board believes that solid domestic growth prospects allow some scope for a measured adjustment in the SDA rate to ensure that monetary and credit conditions continue to be appropriate," the bank said, adding that it will "remain vigilant against a potential build-up in inflation expectations and financial imbalances.
The last time the central bank changed the SDA rate was in 2013 when it was cut by a total of 150 basis points to reduce the inflow of capital and to divert those funds to more productive use.
The decision to maintain its main policy rates is based on the BSP's view that inflation is likely to remain within the bank's target even if the forecasts have been raised due to higher inflation in May and taking into account the potential impact of El Nino on food and utility prices.
Inflation this year is expected to settle within the BSP's upper half of its target range of 4.0 percent, plus/minus one percentage point, and its 2015 target of 3.0 percent, plus/minus one percentage point.
Headline inflation rose to 4.5 percent in May from 4.1 percent, continuing to accelerate since 2.1 percent last August.
"The balance of risks to the inflation outlook remains tilted to the upside, with potential price pressures emanating from the possible uptick in food prices as a result of changing weather conditions, and pending petitions for adjustments in power rates," the BSP said.
Economists had expected the central bank to keep rates steady today but are looking for an increase in the policy rate later this year and next year due to growing inflationary pressures.
The Philippine economy expanded by 1.2 percent in the first quarter from the fourth quarter of last year for annual growth of 5.7 percent, down from 6.3 percent.
The Philippine government is targeting Gross Domestic Product growth this year of 6.5 to 7.5 percent and 7 to 8 percent in 2015. Last year the economy grew by 7.2 percent.