Rate hike unlikely as BSP reviews monetary policy

The Philippines’ central bank has begun a review of policy moves — intended to free up funds amid a global downturn — but said a tightening of key rates may not be forthcoming soon given a benign inflation outlook and tepid economic growth.

Ma. Cyd N. Tuaño-Amador, Bangko Sentral ng Pilipinas (BSP) assistant governor handling the monetary policy sub-sector, said the review was necessary since the crisis — which central bank officials feared would result in a domestic credit freeze — had essentially abated.

"We did some recalibration because of the crisis. Now that the crisis, particularly in the financial system, has passed, we need to review whether we need to withdraw some of the accommodation," she told reporters Monday night.

"We’re seeing capital reflow, which could pose some challenge to liquidity management. It will be a broad policy review of policy tool kits."

The Monetary Board, which sets policy, next meets on December 17.

The central bank cut key rates by a total of two percentage points since December last year to free up liquidity. The overnight borrowing currently rate stands at a record low of four percent, and the overnight lending rate, at six percent.

The BSP also increased the budget for its peso rediscounting facility to P60 billion from P40 billion and slashed bank reserve requirements to 19 percent from 21 percent, also to ensure that the financial system stayed liquid.

Under its rediscounting facility, banks may borrow from the central bank using their receivables as collateral. They thus need not wait to get paid by borrowers before they lend again. A lower reserve requirement, meanwhile, frees money that banks can also lend to clients.

The IMF has said that while global growth remained fragile, governments and central banks should begin planning their exit strategies from fiscal and monetary stimulus programs.

Australia was the first country in the Asia-Pacific to raise interest rates, seeing its gross domestic product growing faster than expected. Its central bank raised the main rate for the second month in a row to 3.5 percent early this month.

Ms. Amador said the BSP would look at a host of indicators to guide its next moves. These include capital flows, inflation, liquidity, and gross domestic product (GDP) growth.

But she noted that "recovery is still fragile, and still needs support."

GDP growth kicked up to 1.5 percent in the second quarter from just 0.6 percent in the previous quarter as a result of pump-priming.

In addition, inflation — which rose to 1.6% in October — is following a "benign inflation path in the near- and medium-term" despite the impact on prices of food and fuel by two recent storms.

The BSP’s 2009 inflation target is 2.5-4.5 percent, rising to 3.5-5.5 percent for 2010.

Still, while policy is appropriate for this year, the BSP is "carefully monitoring settings," she said.

An economist said that with growth still sluggish, the central bank needed maintain rates.

"They are looking at essentially tightening … monetary policy. I don’t agree with it. We’re growing at 1 percent. I think we are at least three quarters away from anything like normalization," said Victor T. Abola at the University of Asia & the Pacific.

"The removal of accommodation is not a problem. Some of those could be removed but to tighten policy in general is not advisable."

GMA

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