BSP keeps rates steady

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) has decided to keep its key rates at record low for eighth consecutive policy-setting meetings since July last year amid the ongoing debt turmoil in Europe, the growing tension between North and South Korea, and the stronger-than-expected gross domestic product growth in the first quarter of the year.

BSP Governor Amando M. Tetangco Jr. said yesterday that the central bank decided to maintain its key policy rates at a record low of four percent for the overnight borrowing rate or reverse repurchase facility and six percent for the overnight lending rate or repurchase facility.

Tetango added that the interest rates on term reverse repurchase facility, repurchase facility, and special deposit accounts (SDAs) were also left unchanged.

This was the eighth straight meeting wherein the board decided to keep its policy rates unchanged. Monetary authorities slashed its key policy rates by 200 basis points since December 2008 to July 2009 but introduced several liquidity-enhancing measures to cushion the impact of the global economic meltdown.

“The Monetary Board’s decision was based on its assessment that the prevailing inflation outlook supports keeping monetary settings unchanged,” Tetangco told reporters.

He pointed out that the upside risks surrounding inflation projections associated mainly with supply-side factors relating to food and energy appeared to have lessened.

“The latest BSP projections show headline inflation averaging within the target ranges for 2010 and 2011,” he added. The BSP has set an inflation target of between 3.5 percent and 5.5 percent this year and between three percent and five percent for next year.

He said the BSP also cited the strong pick up in exports, consumer spending, and investments shown in the first quarter gross domestic product (GDP) data that could lead to potential demand-side pressures.

However, he clarified that these pressures could be tempered by weaker external demand from major trading partners including potential impact of concerns in Europe.

“In the face of uncertain global economic prospects and with recovery at different stages and speeds in various parts of the world, together with the flexibility provided by the inflation outlook, the Board views as prudent the move to keep policy settings unchanged,” Tetangco said.

Apart from keeping its key policy rates unchanged, the BSP also decided to put on hold further withdrawal of liquidity enhancing measures.

Last January 28, monetary authorities started to phase out liquidity enhancing measures that were implemented way back in November 2008 in light of the gradual global economic recovery

Crisis-related measures that were tweaked included the increase in the rate on a short-term lending facility to four percent from 3.5 percent last January 28 as well as the reduction of the peso rediscounting budget to P40 billion and further to pre-crisis level of P20 billion from P60 billion, the restoration of the loan value of all eligible rediscounting papers to 80 percent from 90 percent of the borrowing bank’s credit instrument, and the restoration the non-performing loan (NPL) ratio requirement of two percentage points from 10 percentage points.

Economists and analysts were expecting the BSP to pursue its exit strategy by raising the reserve requirements for banks to pre-crisis level.

As part of its liquidity enhancing measures to cushion the impact of the global financial meltdown in 2008, the BSP slashed the reserve requirement of banks to 19 percent from 21 percent to release more liquidity into the financial system.

Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend.

Deposits maintained by banks with the BSP up to 40 percent of the regular reserve requirement are paid interest at four percent per annum, while liquidity reserves are paid the rate on comparable government securities less half a percentage point.

For his part, BSP Deputy Governor Diwa Guinigundo said monetary authorities continued to review the level of reserve requirements for banks as part of the unwinding of its accommodative policy stance.

“At this point everything is on the table but it will depend on all developments. They are all on the table but it will depend on the directoion and magnitude of inflation pressure,” he explained.

The country’s domestic output as measured by the gross domestic product (GDP) zoomed to its fastest level in almost three years after expanding by 7.3 percent in the first quarter of the year from 0.5 percent in the same quarter last year.

This was faster than the GDP growth range target of 2.6 percent to 3.6 percent set by economic managers through the Cabinet-level Development Budget Coordination Committee (DBCC) for 2010 from 0.9 percent in 2009. –Lawrence Agcaoili (The Philippine Star)