The BSP also said that if the US Federal Reserve Board adjusts its interest rates, there was enough differential between US and Philippine rates to allow the MB to change its policy rates when it becomes necessary.
BSP Governor Rafael Carlos Buenaventura told reporters yesterday that the inflation rate will likely to remain benign for the rest of the year as well as next year, giving the MB some room for flexibility on its monetary policies.
According to Buenaventura, the demand and cost-side pressures were subdued and the only upticks on record were largely driven by changes in relative prices rather than generalized pressure on consumer prices.
As long as inflation rate is low, Buenaventura said the BSP would like to restore the tiering on funds that banks park at the BSP, but said this would not be done until the peso show smore resilience against political and corporate factors that drive the exchange rate.
"We might restore the tiering but we don’t want to do it given the impact on the peso," Buenaventura said. "We will have to watch the market closely."
"The average inflation is expected to fall significantly below the 4.5-to-5.5 percent target for 2003," Buenaventura said. "Over the policy horizon, price dynamics should remain benign with the average inflation for 2004 expected to track the government’s announced target."
The BSP’s own internal target is more aggressive at three to four percent for the whole year. As of September, the average inflation was steady at three percent.
Buenaventura explained that the MB’s expectation of a benign inflation was based on assumptions that there would be subdued improvements in aggregate demands, particularly credit demand which has been lackluster since the 1997 Asian crisis.
The MB scrapped the tiering scheme in order to deal with the historic plunge of the Philippine peso against the dollar, following instructions from President Arroyo to "crack the whip" against dollar speculators.
Previously, the tiering scheme applied a 6.75-percent interest on placements of up to P5 billion. 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.
Effective August, the overnight reverse repurchase (RRP) transactions with the BSP would be accepted at the flat rate of 6.75 percent while term RRPs and special deposit accounts with the BSP would be paid the published rates for corresponding tenors such that the rate would be at a certain spread over the overnight RRP rate.
According to Buenaventura, the BSP had enough monetary tools with which to implement its inflation-targeting policy before it resorts to tweaking either the interest rates or the reserve requirements of banks.
"For one, the BSP can conduct open market operations so it won’t have to rely on fiddling with the reserve requirements since this has a wide-ranging impact on the financial market," Buenaventura said. "There is also sufficient interest rate differential between US and our interest rates to allow us to adjust ours."