BSP maintains key rate at 7.5%

The Bangko Sentral ng Pilipinas (BSP) kept its  key interest rate unchanged along with lower payments for larger overnight deposits as it seeks to expand the economy while warding off threats to inflation.

The BSP kept its reverse repurchase rate at 7.5 percent together with lower payments for amounts exceeding P5 billion, a policy known as “tiering.”

BSP Governor Amando M. Tetangco Jr. said earlier  that interest rates are “appropriate” as gains  in the peso, buoyed by fund inflows, keep prices stable.

Policy makers are studying whether the expanded access to the central bank’s special deposit accounts is curtailing liquidity growth that may fuel inflation, he said.

Yesterday’s data strengthens our case for monetary tightening in a few months’’ on potential pressures to inflation, said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong.

“Rapid money supply growth in an environment of rapid demand expansion warrants steps to tighten monetary conditions in the third quarter,” he added.

The BSP’s broadest measure of money supply has  expanded by more than its 20 percent ceiling for four months to March, fanned by a 24 percent increase in first-quarter remittances. Despite the surging domestic liquidity, Tetangco said the BSP still considers the inflation outlook to be benign due mainly. “For the next several months, the BSP will closely monitor the impact of the new measures or monetary conditions,” he said. “This will serve as basis for subsequent monetary policy actions to ensure the benign inflation environment is maintained,” Tatango said.

“Our main task is to try to mop up the liquidity coming in,’’ Tetangco. “Rates are appropriate where they are now. A strong peso has helped us achieve price stability.’’

In November, the central bank cut interest payments on overnight deposits exceeding P5 billion to P5.5 percent and lowered the rate paid on amounts in excess of P10 billion to 3.5 percent to coax banks to lend to businesses. The benchmark has been held at 7.5 percent since October 2005.

Bank lending rose for the first time in three months in March. The BSP seeks to help spur economic growth by at least 6.1 percent in 2007, the fastest pace in at least three years, following expansion of 5.4 percent last year. — With Bloomberg