Fed move provides policy leeway for BSP

MANILA, Philippines - Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said yesterday the decision of US monetary officials to leave their interest rates steady near zero percent would stabilize the local financial markets and allow the BSP more room to accommodate more expansion.

More than leaving policy rates unchanged, however, Tetangco said that the underlying considerations announced by the US Federal Reserve Board would have a more positive impact on economic recovery.

Tetangco is out of the country to attend meetings in Basel, Switzerland but in a text message to reporters, he said the Philippines and other emerging markets would benefit from this decision.

“The US Fed’s view of subdued inflation pressures is expected to have some stabilizing influence on financial markets,” Tetangco said. “Overall, this helps maintain an environment that provides the BSP with room to sustain its accommodative policy stance.”

The BSP has been telling the market that it would continue to ease monetary policy as long as the economy needed the accommodating stance and inflation outlook was broadly benign.

Moreover, the BSP observed that while lending rates have gone down, the central bank would have to be more aggressive with cutting policy rates to be able to really bring down the cost of borrowing and encourage economic activities.

The central bank said this meant that monetary officials would have to remain aggressive in their monetary policy adjustments to achieve the goal of allowing liquidity to flow from financial institutions into the credit market.

Tetangco said consumers would not see bank lending rates coming down close the levels at which central bank lends to banks and banks lend to each other.

“As of May, we see that lending rates have gone down about a third,” Tetangco said. “But in times like this, we can not expect a 100 percent pass-through of policy rate reductions.”

Tetangco said the pass-through rate was around 40 percent which meant that nearly half of the cut in the policy rate of the central bank have actually been passed on to borrowers.

But Tetangco said the phenomenon was not unique to the Philippines since banks all over the world have had to deal with the fall-out from the economic recession in major markets.

“I have spoken with my counterparts with the other countries and they have confirmed that from their own experience, there is a less than 100 percent pass-through of policy rate cuts,” Tetangco said.

Tetangco explained that credit markets are not exactly out of the woods yet, with uncertainty still the major factor affecting market behaviour. “It’s understandable that financial institutions are more careful although even then borrowing rates have been reduced.”

Tetangco said the BSP’s latest survey indicated only a slight reduction in lending rates but said the policy rate cuts that followed after that should bring the rates down further.

“We’ll have to do another survey later to find out how the rates are doing and whether there had been additional decline in borrowing costs,” Tetangco said. “What is clear from everybody’s experience is that the pass-through rate is substantially less than 100 percent.”