BSP can 'normalize' policy stance - IMF

MANILA, Philippines - The International Monetary Fund (IMF) said there is more scope for the Bangko Sentral ng Pilipinas (BSP) to further adjust policy rates upwards to avoid additional inflationary pressures as foreign capital continued to flood emerging markets including the Philippines.

IMF mission chief Vivek Arora told reporters that it may be necessary for the BSP’s Monetary Board to further normalize its policy stance due to the abundant liquidity in the financial system as well as the sustained economic recovery.

“With abundant liquidity and strong recovery, it may be necessary to continue normalizing the policy stance. If a tail were to normalize, such as global shock, there is scope to adjust the pace of timing of policy normalization,” Arora stressed.

The Monetary Board is set to hold its next policy rate setting meeting on July 28.

It has raised key policy rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid escalating oil prices in the world market. This brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

The twin action was followed by an increase in the reserve requirement for banks to 20 percent from 19 percent to siphon off at least P38 billion from the financial system to curb additional inflationary pressures arising from excess liquidity.

Latest data showed that domestic liquidity or M3 grew eight percent to P4.261 trillion as of end-May from P3.945 trillion recorded in the same month last year. M3 is the amount of money circulating in the domestic economy.

Arora pointed out that the fragile economic environment remains a key risk to outlook as monetary authorities need to carefully manage the strong capital inflows in order to avoid macroeconomic and asset price volatility.

He explained that the members of the IMF staff mission for the 2010 Article IV Consultations believe that the country’s inflation would remain with the BSP target range of three percent to five percent for this year and next year.

“Inflation is expected to remain within the target this year and next year, and the balance of payments to remain in surplus,” he said.

Arora said the BSP has handled the crisis very well and was able to contain inflation at low levels through a combination of policy rate hikes as well as the lifting of liquidity enhancing measures as early as last year.

Earlier, IMF retained the country’s growth forecasts this year and next year despite the economic slowdown in the first quarter of the year.

Arora said the Philippines would likely post a five percent expansion in its gross domestic product (GDP) this year and next year as growth would likely pick up in the second half after slowing down in the first half.