Hot: BSP Raises Interest Rates!

So finally, pressures from invisible influentially powerful groups may have forced the BSP to act.

From the BSP:  (bold mine)

At its meeting today, the Monetary Board decided to increase the BSP's key policy rates by 25 basis points to 3.75 percent for the overnight borrowing or reverse repurchase (RRP) facility and 5.75 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs and RPs were also raised accordingly. The rate on special deposit accounts (SDA) was left unchanged. Meanwhile, the reserve requirement ratios were also kept steady. 

The Monetary Board’s decision is a preemptive response to signs of inflation pressures and elevated inflation expectations. Latest baseline forecasts indicate that the inflation target could be at risk, as the forecasts have shifted closer toward the higher end of the target range of 3±1 percent for 2015. At the same time, the balance of risks to the inflation outlook continues to be tilted toward the upside, with price pressures emanating from higher food prices, short-term volatility in international oil prices, and pending petitions for adjustments in power rates and transport fares. Moreover, while inflation expectations remain within target, they are seen to be settling toward the upper end of the inflation target range, particularly for 2015. The Monetary Board also sees the increase in policy rates as a preemptive measure in the context of the eventual normalization of monetary policy in some advanced economies.

Given the BSP's statistical methodology in arriving at official numbers, where a big segment of goods are under price controls and or tightly regulated, for the BSP to say that  "inflation target could be at risk", implies bigger than official inflation rates. Some political influential groups have been getting alot edgy.

Of course the marginal increase in policy rates will still mean negative real rates. So it will take more increases to put a brake on the credit bubble. All these also reveal that former actions (reserve requirements, SDA rates) have flunked.

Nonetheless, surging inflation rates, rising interest rates and soaring non performing loans (NPLs) particularly for the property sector implies strains on demand that will impact on the real and statistical economy, as well as, increased pressures on the balance sheets of both leveraged enterprises and households. 

This means that for Philippine financial asset bulls, watch out below!