BSP maintains key interest rate

The Bangko Sentral ng Pilipinas (BSP) kept its key interest rate unchanged at 7.5 percent for a third month yesterday to boost economic growth as a rising peso helps dampen inflationary pressures.

"The monetary board noted that recent evidence of easing inflation pressures supports an unchanged policy setting,’’ BSP Governor Amando Tetangco Jr. said. "Easing energy prices, favorable food prices and the appreciation of the peso should help keep price pressures at bay in the near term," he added.

The peso’s 6.6 percent rise against the dollar in the past three months has cut import costs and helped push inflation to a 16-month low in December, taking pressure off the BSP to raise borrowing costs.

The Philippines needs lower interest rates to encourage consumers and companies to spend and invest, spurring the $85 billion economy.

"The decision was expected. The silent message here is that the BSP is now shifting to a neutral bias," said Jose Vistan, head of research at AB Capital in Manila. "The tightening period is over."

The BSP is working within the framework of keeping inflation rate within its 2006 target of 5-6 percent although its actual projected average inflation rate was between 7.5 percent and 8.2 percent.

The decision of the BSP to keep its key rate unchanged set the tone for the Monetary Board’s policy stance for the rest of the year, although monetary officials said they are closely monitoring the movements in consumer prices.

Despite the increase in consumer spending during the holiday season, the year-on-year headline inflation rate in December decelerated to 6.6 percent from 7.1 percent in November.

The whole-year average inflation ended up at 7.6 percent, hitting the high-end of the projected rate of the BSP.

Inflation this year may accelerate to as much as 8.2 percent, according to the BSP. Increases in consumer prices may gather pace in coming months due to government plans to increase the expanded value-added-tax to 12 percent from 10 percent on Feb. 1 following the expansion of its coverage to include oil, power and other previously exempt products and services on Nov. 1.

The BSP will probably raise rates by one percentage point this year, Ravelas said. That’s a quarter- point more than the total increases in 2005.

The central bank’s monetary policy committee meets every four weeks to discuss interest rates. It left the rate unchanged at last month’s meeting after raising the rate by three-quarters of a percentage point in 2005, a quarter-point each in October, September and April.

Philippine commercial bank loans fell 0.4 percent in October from the previous month as lenders struggled with bad loans and weak demand for credit from businessmen.