BSP keeps key overnight rates

The Monetary Board (MB), the policymaking body of the Bangko Sentral ng Pilipinas (BSP), kept its key rates unchanged and said that meetings on monetary policy, starting next week, will only be held every four weeks.

"Except for emergency situations, decisions on monetary policy will be done every four weeks under normal situations, and the minutes of meetings will be published after six weeks," BSP Governor Rafael Buenaventura said yesterday.

On the other hand, the BSP advisory committee will meet on Jan. 15 to discuss the BSP’s adoption of inflation targeting as the new framework for monetary policy.

The committee is expected to come up with a recommendation on monetary policy that will be submitted for consideration by the MB. The committee was created as part of the institutional framework for inflation targeting. It is chaired by the BSP governor, with the deputy governors for banking services and supervision, and the heads of the research and treasury departments as members.

The committee is scheduled to meet regularly once a month to deliberate, discuss and make recommendations to the monetary board on issues relating to the formulation and implementation of monetary policy.

The BSP has adopted inflation targeting as the framework for monetary policy, a shift from the monetary aggregate targeting.

Buenaventura said under the new framework, the BSP is committed to achieve the government’s average annual inflation target of five to six percent for 2002 and 4.5 to 5.5 percent for 2003.

These targets were set by the Development Budget and Coordinating Council (DBCC) composed of the Department of Finance (DOF), the Department of Budget and Management (DBM), the National Economic and Development Authority (NEDA) and the Office of the President and the central bank.

The approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period. The target inflation rate will be set and announced jointly by the BSP and the DBCC, although the responsibility of achieving the target will rest largely on the BSP.

The BSP wants to shift to inflation targeting because it is easier understood by the public and allows a great focus on the goal of price stability.

Also, it reflects a comprehensive approach to policy by taking into consideration the widest set of available information about the economy.

BSP which will target headline inflation, is also supposed to monitor core inflation trends.

It has adopted several procedures to ensure accountability and transparency wherein BSP and DBCC will announce the targets and instruments change.

In case of a breached budget, BSP will submit a letter to President Arroyo explaining reasons for the breach. The BSP will also publish minutes of Monetary Board meetings with policy changes to ensure attainment of inflation targets, and an advisory committee to the MB will be assigned composed of the BSP Governor, Deputy Governor for research and treasury, managing director, department of economic research director and treasury director.

Under the current monetary framework, the Philippines defines its inflation target in terms of headline inflation, or the annual growth of consumer price index. However, a shift to inflation targeting will require a closer examination of which price variable to target since greater accountability for meeting this target will be lodged with the BSP.

Inflation targeting is seen to improve transparency since the public would have a quick access to how the inflation target is being drawn and how the BSP was able to come up with such target through the Internet.

Unlike a pure monetary targeting framework where the focus is solely on money, the BSP has adopted measures that put relatively more emphasis on its inflation objective and has broadened the information set that is used to guide monetary policy to include indicators of economic activity, among others.

On the overnight rates which remained at 7.75 percent and 10 percent for its borrowing and lending facilities, respectively, Buenaventura said there is no need to change rates yet because there are no fresh news to warrant an adjustment.

At the same time, Buenaventura said the BSP wanted its earlier monetary easing measures to work their way into the system before considering another move.

Previously, Buenaventura said the BSP is contemplating the possibility of lowering overnight rates by 25 to 50 basis points, as well as slashing the reserve requirements of commercial banks, but added more data and analysis is needed to determine if such monetary easing moves can be done this month.