BSP maintains key rates for now

The Monetary Board (MB), the policy-making body of the Bangko Sentral ng Pilipinas (BSP), said it is not likely to change its key rates this week, especially after bringing down overnight borrowing and lending rates by 50 basis points and allowing these to return to their pre-juetengate levels last October.

BSP Governor Rafael Buenaventura said the Central Bank will keep key rates stable for now and await other developments influencing local interest rates before deciding on adjusting rates anew."Right now, the best thing after trimming rates to pre-juetengate levels is to wait for the latest inflation data and to watch what the US Federal Reserve will do about its own rates," Buenaventura said.

Currently, the BSP’s short-term interest rates stand at 11 percent for borrowing and 13.25 percent for its lending windows. The latest rate cut marks the fifth policy rate cut since the beginning of the year, bringing the reduction in the BSP’s policy rates to a cumulative total of 400 basis points since December.

Government intends to keep interest rates down to encourage investors to borrow from banks, expand their operations and create more jobs. Lower interest rates help trim corporate borrowing costs and move funds from fixed-income instruments to other types of investments like equities.

The BSP uses overnight rates as a tool to maintain price stability and to prevent wild fluctuations of the peso. With the cut in overnight rates, the yield on Treasury bills is expected to also decline. The T-bill rates are used as a benchmark for banks’ borrowing rates.

Buenaventura added the BSP is also constrained from further trimming its key rates because the yield on the 90-day London Interbank Offered Rate or LIBOR which is often used as the benchmark for international short-term loans, has not yet gone down.

The BSP chief said the current LIBOR rate is 5.39 percent, giving local investment an after-tax yield advantage of 3.41 percent.

Buenaventura said the next rate cut could happen once the US Fed pushes through with its own plan to cut key rates by March 31, a move that is expected to prevent a potential recession in the US. The BSP usually takes its cue on local interest rates from the US Fed.

The other day, US Federal Reserve Chairman Alan Greenspan said the US economy faced the risk of a sharp slowdown but should recover by year’s end, which financial markets interpreted as a sign the US Fed does not see the need to cut interest rates as sharply as some quarters had earlier forecast.