BSP raises key rates

The Bangko Sentral ng Pilipinas (BSP) raised its key interest rates by half a percentage point yesterday in an attempt to prevent investment funds from flowing out of the country and to support a sagging peso following a similar rise in US interest rates.

The BSP's decision to raise its overnight borrowing rate to 9.50 percent and its lending rate to 11.25 percent had a mixed effect on local financial markets.

"The hike in BSP policy rate is expected to keep a lid on domestic inflation," BSP Deputy Gov. Amando Tetangco said yesterday.

"This reflects a forward-looking monetary policy response to the possible future rise in inflation due to demand-side pressures with the projected growth of the economy and the continued depreciation of the peso," he said.

The BSP's key policy rates were last increased on April 27 by 0.25 percentage point in a pre-emptive move against the US Federal Reserve's rate increase.

Analysts said that were it not for the poor state of investor confidence in the Philippines, the BSP would probably have raised its rates by only a quarter point Wednesday to keep spreads on peso investments competitive.

BSP Gov. Rafael Buenaventura said the adjustment was necessary to discourage funds from shifting out of peso investments into dollar investments after the US raised interest rates.

With the peso already under pressure from perceptions that the country is a high political risk, a further outflow of funds chasing higher yields elsewhere would almost certainly push the peso even lower.

Currency traders, however, said the hike in interest rates did not have much impact on the peso since it did not stop from depreciating against the dollar yesterday morning.

"It (rise in overnight rates) will not do much to quell the depreciation of the peso," a trader from a local commercial bank said.

Buenaventura, who is accompanying President Estrada on a state visit to China, said the increase in policy rates shouldn't trigger higher bank lending rates.

"Any increase in bank lending rates isn't justified," Buenaventura said, adding growth remains subdued and that there is ample liquidity in the financial system.

For the past few weeks, bank lending rates have ranged between 11 percent to 14 percent.

Even with the Fed meeting now out of the way, currency watchers are generally skeptical that the peso will strengthen much since investor confidence in the Philippines is likely to remain low.

A hostage crisis involving 21 Asians and Westerners being held by Muslim rebels in Mindanao and an escalating armed conflict between government forces and Muslim separatists are also casting the country in a poor light internationally. -- With AP