BSP likely to keep key rates steady

The Bangko Sentral ng Pilipinas (BSP) is expected to hold its policy rates steady when the Monetary Board (MB) meets tomorrow to reassess its monetary stance.

The combined effects of the strong peso, steady interest rates and domestic prices have kept inflation rate on the downward path much lower than monetary officials projected, giving the MB even wider room to flex its monetary tools.

BSP Governor Amando M. Tetangco Jr. said the decision of the US Federal Reserve Committee also gave them even more flexibility although officials are wary of suggestions that policy rates should actually be brought down.

Although oil prices have not stopped dropping, Tetangco said the MB would have to take stock of how inflation would behave in 2007 and on to 2008.

The BSP reported that inflation is expected to go down in 2007 with a slight increase in the second half but the average was projected to be within the three to four percent target.

"We expect it to further go down in 2008 as well," said BSP Deputy Governor Diwa Guinigundo.

According to Guinigundo, demand side pressures are largely benign but said despite the slowdown in domestic liquidity, the expansion was still strong due to inflows of foreign exchange.

"It’s tempting to say that we can now ease our monetary policies but do we really want to do that at a time when forex inflows are very strong?" Guinigundo pointed out. "Remember, when remittances or export earnings come in, that’s more peso coming into the system and that puts pressure on inflation."

Beyond the unpredictability in world oil prices, monetary officials said their main concern was the impact of surging dollar inflows on inflation.

"We are looking at liquidity growth due to forex inflows and we are still determining to what extent this would impact future inflation," Guinigundo said.

The MB is also expected to make a decision on the proposal to raise the ceiling on the overbought limits of banks which would allow them to buy more forex from the market.

This move, Guinigundo admitted, would have the effect of slowing down the peso’s appreciation if not weaken it somewhat; unless forex demands actually manages to even it out.

According to Guinigundo, the BSP’s monetary stance was to ensure that domestic liquidity levels were appropriate for the level of economic activity.