BSP may adopt exit strategy earlier than expected

MANILA, Philippines – American banking giant Citigroup sees the Bangko Sentral ng Pilipinas (BSP) implementing an exit strategy earlier than expected in light of 2010 election-related spending and the conversion of offshore inflows.

Citi economist Jun Trinidad said there would be urgency for the central bank to mitigate the risk of a faster pass-through from food and energy prices due to hefty liquidity risk associated with the first quarter election spending and conversion of offshore flows mainly the money sent home by overseas Filipino workers (OFWs).

“On this note, we believe an exit strategy may have to be implemented earlier rather than later with emphasis on withdrawing expansionary liquidity measures,” Trinidad stressed.

He pointed out that monetary authorities are likely to await stronger signals of sustained global economic recovery before adjusting its key policy rates.

“Policymakers may await firmer signals of global recovery and strong evidence that Philippine recovery has kicked in before adjusting policy rates,” the economist added.

The BSP slashed its key policy rates by 200 basis points between December 2008 and July last year as part of easing cycle to help the domestic economy survive the global economic slump.

This brought the overnight borrowing rate to a record low of four percent and the overnight lending rate at six percent.

Trinidad said the central bank’s exit strategy would first focus on lifting liquidity-enhancing measures before adjusting its key policy rates right after the national and local elections this year.

“Considering the lags in the data, the first rate hike may come after the May elections as anticipated,” he added.

In November of 2008, the BSP adopted a series of liquidity enhancing measures to free up liquidity in the system and help the Philippines survive the global financial crisis.

Aside from the rate cut, other measures adopted included the reduction in the reserve requirement of banks to 19 percent from 21 percent, the increase in the rediscount facility to P60 billion from P20 billion as well as the introduction of peso and US dollar repurchase facility.

Trinidad warned that consumer prices could exceed five percent this year if there is an absence of strong policy intervention.

“Unless there’s a strong policy intervention or a sharp peso appreciation, the inflation velocity over the next 12 months can easily lead to an overshoot of BSP’s annual inflation target,” he said.

The BSP sees inflation ranging between 3.5 percent and 5.5 percent this year as well as three percent and five percent next year.

Earlier, BSP Governor Amando M. Tetangco Jr. said monetary authorities have already mapped out an exit strategy from its easy money policy but is waiting for the proper time to implement the plan. –Lawrence Agcaoili (The Philippine Star)