BSP keeps policy rates steady

The Bangko Sentral ng Pilipinas (BSP) decided yesterday to keep its benchmark interest rates unchanged, while keeping lower payments for larger deposits to spur lending and boost economic growth.

The BSP maintained its overnight policy rate at 7.5 percent for deposits of up to P5 billion and kept lower payments for higher amounts, BSP Deputy Governor Diwa Guinigundo said yesterday.

The BSP also maintained its overnight lending rate at 9.75 percent.

Guinigundo said the Monetary Board’s assessment of the monetary policy stance indicates that inflation readings remain in line with the forecast path.

"Supply-side pressures have diminished noticeably in recent months and demand-side pressures continue to be minimal," Guinigundo said.

The economy may have grown as little as 5.1 percent in the fourth quarter, hurt by storms that damaged crops, Economic Planning Director Dennis Arroyo said.

Last quarter’s performance may drag economic expansion in 2006 to as low as 5.3 percent compared to the government’s minimum target of 5.5 percent.

The BSP is still studying changes on commercial banks’ foreign currency limits, Guinigundo said.

As the peso strengthens, the BSP is examining ways to introduce a "measured liberalization" of its foreign- exchange rules, BSP Governor Amando Tetangco said this week. South Korea and Thailand have introduced measures to stem currency gains that were threatening exports.

The BSP’s borrowing costs have been held at 7.5 percent since October 2005, even as inflation slowed from as high as 8.5 percent that year to 4.3 percent last month. The central bank aims to contain inflation to within a target range of four percent and five percent this year.

Inflation, which had been slowing since March, averaged 6.2 percent in 2006, the government reported earlier.

While the BSP expects inflation to hit its target this year, it remains watchful of risks like volatile oil prices, an expected drought that could affect farm output, a possible increase in wages and rising capital inflow from remittances and investment, Tetangco said.

Tiering system

The market has been expecting the MB to adjust its placement rates for bank deposits with the BSP but Guinigundo said the MB decided that the policy action in November should be given time to work its way through the various channels of monetary policy, including the credit channel.

"Historically, an action like this would take between three and four months to work its way through and ultimately show some adjustments in bank lending," he said. "Not enough time has passed for us to touch this now."

The decision meant that the rate structure would remain tiered, applicable to bank placements under the reverse purchase (RP), reverse repurchase (RRP) and special deposit accounts (SDA) windows of the BSP.

Bank funds parked with the BSP would continue to earn less than the uniform 7.5 percent. The first P5 billion deposited by banks would be subject to the BSP published rate, in this case 7.5 percent.

On the other hand, parked funds in excess of the first P5 billion up to P10 billion would earn the published rate less 200 basis points, equivalent to 5.5 percent.

Finally, anything over P10 billion would be 400 basis points less the published rate, equivalent to an effective rate of 3.5 percent.

Manipulating the rates structure on funds parked by banks with the BSP is one of the monetary tools used by the central bank to influence market behavior and nudge economic activity as a whole.

The higher the rates on these parked funds, the more money banks would prefer to deposit with the BSP since they would earn more. The lower the rate, the less funds would be parked while the rest is forced out into the system.

"With the tiering system in place, they can afford to be more cautious, to hold out till March,’’ said Christy Tan, a currency strategist and economist at Bank of America in Singapore. "By then they’ll have more inflation data."