BSP needs no policy adjustment — IMF

The International Monetary Fund (IMF) said there was no need for the Bangko Sentral ng Pilipinas (BSP) to tweak its monetary stance, saying that the current handling of the inflation target was "appropriate".

The IMF said the current monetary policy settings of the BSP appeared consistent with inflation returning within target over the next 12 months.

"The policy stance of the BSP is evenly-balanced and all indicators point to a declining trend in inflation rate," said IMF resident representative Reza Baqir.

After successive rounds of tightening in 2005, the BSP has left rates unchanged, saying that the absence of near-term demand pressures would allow inflation to return to the four- to five-percent target in 2007.

According to the IMF report, there were concerns on whether there were upside risks to inflation from the rapid growth in monetary aggregates.

The upward trend in domestic liquidity over the past two years, the IMF said, was largely due to the build up in foreign assets with some offset provided by the BSP action including through foreign exchange swaps.

"There has been a recent acceleration in M3 growth but this reflected a shift back into deposits once unit investment trust funds were redeemed rather than a change in money supply," the IMF said.

The IMF said it was possible that additional increases in oil prices posed greater upside risks to the inflation outlook. There were possible downside risks to the inflation forecast from additional peso appreciation.

The BSP itself said strong foreign exchange inflow was expected to feed a continuous increase in domestic liquidity, making it unlikely for monetary officials to start considering the monetary relaxation.

As the country’s macroeconomic fundamentals improved, monetary officials said foreign exchange inflow would strengthen even more as improving prospects lure investments into the country.

The BSP had projected that workers remittances alone would reach close to $12 billion while foreign direct investments would reach close to $2 billion this year.

BSP said strong inflow of foreign exchange effectively releases more pesos into the money supply, thereby increasing domestic liquidity and creating some measure of inflationary pressure.

If domestic liquidity should continue to increase, there would be little reason to ease the BSP’s policy rates and depending on the strength of inflows, there might even be a need to tighten the money supply to keep inflationary pressures at bay.