Why Philippines' central bank held on tight to its hawkish tone

And even maintained its rate steady.

According to DBS, as expected, Bangko Sentral ng Pilipinas (BSP) kept to its hawkish tone on Thursday even if it maintained its key policy rate steady at 3.50%. The special deposit rate (SDA) was raised by 25bps to 2.25% effective immediately, as the central bank warns about excessive liquidity in the financial system.

Here's more from DBS: 

The reserve requirement ratio (RRR) was kept steady at 20%. As early as the next policy meeting, we may see a 25bps rate hike in the key overnight borrowing rate.

Clearly, the central bank is a little concerned with regards to rising inflationary pressures in the economy. CPI inflation forecast has been
raised again to 4.4% in 2014 and 3.7% in 2015. Indeed, we see a good chance for CPI inflation inching just above the 5% mark in 3Q14, which is the upper limit of the central bank’s 3-5% comfort zone.

The tight monetary policy stance may provide support for the peso, which will help to ease imported inflationary pressures. More importantly, this also makes perfect sense since the government is busy trying to boost investment growth in the economy.

Imports of capital goods are crucial for the outlook on investment growth going forward. Downside risks on GDP growth from higher interest rates are still limited at this juncture. Domestic demand drivers remain strong. And it is not like the BSP will tighten too much anyway, for the central bank is likely to raise the overnight borrowing rate to 4% before staying put for some time.