BSP expected to maintain rates

The Bangko Sentral ng Pilipinas (BSP) is expected to keep its key interest rate unchanged for a fourth straight month as a strengthening peso helps control inflation.

The senior economic managers of the Arroyo administration briefed businessmen and market analysts on Wednesday, saying that despite the rise in inflation in January, there is still no compelling reason to take any action to raise interet rates.

BSP Governor Amando M. Tetangco said that the continued appreciation of the peso, the slowdown in domestic liquidity growth and the absence of demand-side pressures favored the BSP’s current monetary stance.

"We will have a formal review of course, when the MB meets this week," Tetangco told reporters. "But it is likely that there will be no change in our policy stance."

Even with the increase in US interest rates, Tetangco said the monetary board need not match the US Fed move for move.

The US Fed boosted the federal funds rate by one-quarter percentage point to 4.50 percent. This is the rate that banks charge each other on overnight loans, affecting a range of interest rates charged to consumers and businesses.

According to Tetangco, however, he saw no indication that the US Fed action needed to be matched by the monetary board considering the country’s own macro-economic fundamentals.

At present, the BSP’s overnight borrowing rate is at 7.50 percent and the lending rate is at 9.75 percent. These rates were last touched in October 2005 when the MB approved a 25-basis-point increase.

"There is no reason to raise interest rates with the peso’s appreciation, which may continue with the expected inflow of foreign investments," said Jose Vistan, an economist at AB Capital Securities in Manila.

The peso’s 7.8-percent gain against the dollar since the BSP last raised its benchmark rate on Oct. 20 is making oil and other imported goods less expensive.

"At this point in time the policy rates of the Bangko Sentral are just pitched properly," Tetangco said. "They are just appropriate at this point in time."

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

The BSP said the growth in domestic liquidity slowed down mainly due to the 5.5- percent decline in net lending to the National Government which led to a dip in overall credit to the public sector.

With the national budget deficit on a downtrend, there would be even less pressure for the government to borrow although the BSP has been suggesting that the Arroyo administration increase its domestic borrowing.

"The risk is higher that the central bank will raise the rate in March,’’ said Christy Tan, an economist at Bank of America in Singapore. "If inflation in March comes in very high, there could be a 25 basis point hike."

The Philippine 91-day Treasury bill yield, the benchmark for commercial banks’ lending rates, rose 5.097 percent at this week’s government auction from 4.863 percent on Jan. 16. It was the first time in three weeks that the government accepted bids for the 91-day debt securities. Investors use the central bank’s benchmark rate as a guide when bidding at the auction.