BSP seen keeping policy rates until mid-2011

MANILA, Philippines - Washington-based The Institute of International Finance Inc. (IIF), the world’s only global association of financial institutions, believes that the Bangko Sentral ng Pilipinas (BSP) will keep its key policy rates at record lows until the middle of next year on the back of a benign inflation environment.

In a paper, IIF said the BSP would not adjust its overnight borrowing and lending rates until the middle of next year as monetary authorities expect inflation to stay within the target of three percent to five percent in 2011 and in 2012.

“Rising policy rates and reserve requirements are viewed by the authorities as harsh measures and are not likely to be considered until mid-2011,” IIF stated in the 11-page report.

According to the report, the BSP believes that taking a more aggressive stance by raising its key policy stance would derail the country’s strong economic recovery.

“In contrast to many of its peers, the authorities do not refer to the post-crisis need of normalizing interest rates, which have remained greater than inflation, and believe that taking a more aggressive policy stance would jeopardize the recovery. While the central bank may have an optimistic inflation forecast, it is clear that it sees no urgency for changing policy,” it said.

The BSP slashed its key policy rates by 200 basis points between December 2008 and July of 2009 to cushion the impact of the global financial crisis on the domestic economy. This brought the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent.

The Philippines barely escaped recession last year as its GDP growth slackened to 1.1 percent from 3.8 percent in 2008.

Economic managers see the country’s GDP expanding between seven percent and eight percent a year from the revised forecast of five percent to six percent.

IIF sees the country’s GDP growing at a faster rate of 6.5 percent this year before slowing down to six percent next year.

“Real GDP is set to grow by 6.5 percent in 2010 due in part to the sharp post-crisis recovery at the beginning of the year, but recede to six percent in 2011 before rebounding to 6.5 percent in 2012,” it added.

IIF said the Philippines banking system was largely insulated from the global crisis and the economy has few of the dislocations that could hamper growth over the near term.