BSP ups rates anew to ease pressure on peso

The Bangko Sentral ng Pilipinas (BSP) raised yesterday its key interest rates by half a percentage point for the second time in three days to ease speculative pressure on the peso and to preempt the anticipated increase in US interest rates when the US Federal Open Market Committee meets again in July.

Just two days earlier, the BSP increased its overnight rates by half a percentage point to match a similar increase in US rates.

The rate hike, which took effect yesterday, pushed the BSP's overnight borrowing rate to 10 percent and the lending rate to 12.25 percent.

"The policy rate adjustment is in further anticipation of the US Fed's tightening bias, a factor that domestic market players have already discounted as they continue to maintain long dollar positions," BSP Deputy Gov. Amando Tetangco said.

"This will put local monetary policy initiative ahead of the US Fed's decision curve. The US Fed, even after its May 16 decision, continues to hold the view that present risks are weighted mainly toward conditions that may generate heightened inflation pressure in the future," he added.

While Wednesday's increase in the overnight rate was generally ignored by the foreign exchange market, this time it seemed to have worked. The peso closed higher at 41.670 against Thursday's close of 41.730 to the dollar at the Philippine Dealing Sytem (PDS), the electronic interbank currency market.

"The peso is still under pressure but the depreciation has somewhat been abated," a currency trader from a local commercial bank said.

"As a pre-emptive move, they should have brought it up by 100 basis points," another trader from a foreign bank said.

BSP Managing Director Diwa Guinigundo said they expect the US central bank to raise its key interest rates by another 25 to 50 basis points in July.

"It's a very calculated move," he said. "When we decided to raise it, we consider two important things: The imminent problem at the foreign exchange market which could impact on inflation and second, its implication on growth, especially on lending activities."

Government has attempted to keep interest rates down since late 1998 to stimulate bank lending and corporate investment.

Despite low interest rates, bank lending has been sluggish. Analysts said the rise in interest rates will further dampen bank lending.

ING Barings senior economist Joey Cuyegkeng, however, said the impact (of overnight rate hike) is not going to be significant since banks are still competing for a generally weak loan demand. -