BSP Governor Rafael Buenaventura told reporters that the projected range for October inflation bolstered the BSP’s expectation of benign pressures for the remainder of 2003, when the inflation was projected to be at an average of three percent.
After averaging three percent for the first nine months, the BSP said the average annual inflation rate would fall below the government’s target of 4.5 percent to 5.5 percent in 2003 and settle within the range target of four percent to five percent in 2004, possibly down to as low as 3.5 percent if prices do not shoot up in December.
"The pressure from the fluctuations in world oil prices is no longer present, its all quiet in that front so we aren’t expecting any major disruption in prices this month," Buenaventura said. "On top of that, regional currencies are also stable."
"Given the relative absence of significant inflation risks coupled with moderately improving economic activity, the BSP believes that current monetary policy stance is appropriately supportive of the economy’s growth objective without posing undue risks to price stability," he said.
According to Buenaventura, the benign inflation outlook for the whole year would give the BSP more flexibility in its monetary policies since it would not be as hard to dampen the impact of peso depreciation on domestic prices.
The BSP has decided to maintain its policy rates but the tiering scheme on bank placements was scrapped in an attempt to ease the inflationary impact of the peso depreciation.
Buenaventura said the decision to mop up liquidity was a „preemptive measure" to prevent adverse inflation expectations as the peso took a five-day plunge down to historic lows.
"The Monetary Board felt that persistent large daily movements in the exchange rate might serve to raise these inflation expectations," he said. "So we decided that all bank placements with the BSP would be accepted at a flat rate of 6.75 percent."
Previously, the tiering scheme applied a 6.75 percent interest on placements of up to P5 billion will earn 6.75 percent. Placements in excess of P5 billion up to P10 billion will earn an interest of 3.75 percent while placements in excess of P10 billion will have an interest rate of 0.75 percent.
However, Buenaventura said the situation did not require a reduction in the actual policy rates of the BSP and these would be maintained at 6.75 percent for the overnight borrowing rate and nine percent for the overnight lending rate effective yesterday, the lowest rates since May 1992.
Buenaventura said the MB decision also factored in the slowdown in the country’s gross domestic product (GDP) for the second quarter which was drastically lower than expected at 3.2 percent.