MANILA, FEBRUARY 8, 2011 (STANDARD) The central bank will again review its economic assumptions this week to determine if the inflation rate is, indeed, acting up or veering away from the course that the monetary authorities want it to track.
The inflation rate in January rose to 3.5 percent, the fastest pace in four months, fueling fears that the Bangko Sentral may finally step on the breaks and allow interest rates to go up from their record lows. Indonesia's surprise move last week to raise its benchmark interest rate for the first time in more than two years has not helped to douse the concerns of some investors. The stock market fell sharply recently after investors' confidence was shaken up by the specter of higher interest rates.
Stil, Bangko Sentral Governor Amando Tetangco Jr. has sought to calm the investors' fears. The central bank's inflation forecasts might be adjusted upward, but Tetangco said he did not expect an immediate need to increase the benchmark interest rate. "The inflation forecast is still within target; there is no urgency to increase rates," Tetangco assured reporters.
The central bank sees consumer prices rising by an average of 3.6 percent this year and 3 percent in 2012, taking into account the impending increase in food prices and transport fares.
Raising interest rates will essentially temper a perceived increase in inflation in the coming months. The higher borrowing cost of money will siphon off liquidity in the financial system by re-directing funds to high-yielding Treasury bills and other more attractive investment outlets.
Inflation normally slows down over time as a result of the higher cost of borrowing. The increased cost of goods, including food, will eventually dampen consumer spending.
The cycle, however, will reduce economic growth overall and the opportunities for job generation as fewer companies will expand or increase their output due to the high cost of money.
The central bank may increase interest rates as a policy to moderate inflation after revisiting the macro-economic assumptions it used in coming up with earlier projections. It may also keep the rates low for some time to accommodate economic growth if it finds that the current liquidity is just enough to fund economic growth.
The Bangko Sentral, at the end of the day, will weigh the ideal exchange rate, prevailing and future oil prices, economic growth, and all the factors that interplay with each other before raising the cost of money
Chief News Editor: Sol Jose Vanzi
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