BSP tags exit timing as major risk to growth

Published by rudy Date posted on March 5, 2010

MANILA, Philippines – The timing of the implementation of an exit strategy from an accommodative policy stance emerged as one of the major risks that could derail the recovery of the country’s domestic economy from a major slump last year, a top official of the Bangko Sentral ng Pilipinas (BSP) said yesterday.

BSP Deputy Governor Diwa Guinigundo said the timing of the unwinding from the current loose policy stance is very crucial since it could hurt economic recovery or lead to rising inflation.

“Exiting too soon could hurt recovery, exiting too late could lead to inflation and asset bubbles,” Guinigundo stressed.

He pointed out that monetary authorities would continue to exercise vigilance over price development to make sure that monetary settings remain consistent with price stability objective.

“The BSP will continue with its pursuit of macroeconomic and financial stability,” he added.

In November of 2008, monetary authorities took proactive steps to lessen the adverse impact of the global financial crisis. The BSP approved the implementation of several liquidity enhancing measures including the two percentage points reduction in the reserve requirement on bank deposits and substitutes to 19 percent from 21 percent and the tripling of the rediscount window to P60 billion from P20 billion.

The BSP also slashed its key policy rates by 200 basis points between December of 2008 and July of 2009, bringing the overnight borrowing rate to a record low of four percent and the overnight lending rate to six percent.

Last Jan. 28, monetary authorities started implementing an exit strategy through the increase of the rediscount rate to four percent putting it at par with the overnight borrowing rates also pegged at a record low of four percent.

Guinigundo said other risks and challenges to the country’s economic growth outlook include uneven pace of recovery, surge of capital flows, and commodity price pressures.

He pointed out that there is uneven pace since developed countries are experiencing weak recovery while emerging markets are experiencing strong recovery.

He also warned that large capital inflows could lead to liquidity management problems.

According to him, global economic recovery as well as the continued weakening of the dollar could raise commodity prices resulting in higher inflation.

The BSP sees inflation averaging at 4.7 percent, well within its target of 3.5 percent to 5.5 percent this year from 3.2 percent last year.

“There is a need to ensure that external vulnerabilities are reduced by promoting a healthy external payments dynamics and sustainability of external debt,” he added.

The BSP official said the country’s gross international reserves (GIR) is expected to hit a new record high of between $47 billion and $48 billion this year from $45.03 billion last year while the balance of payments (BOP) is expected to stabilize at $3 billion to $4 billion from $5.3 billion. –Lawrence Agcaoili (The Philippine Star)

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