BSP keeps key interest rates steady

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) kept yesterday its key interest rates unchanged for the second straight policy rate setting meeting but decided to raise anew the reserve requirement on deposits and deposit substitute of banks and non-banks with quasi-banking functions in what it called as a forward looking move to better manage liquidity.

BSP officer-in-charge Juan de Zuñiga Jr. said in a press conference that the central bank’s Monetary Board kept interest rates at 4.50 percent for the overnight borrowing rate and 6.50 percent for the overnight lending rate but increased anew the reserve requirement ratio for banks to 21 percent from 20 percent effective Aug. 5.

De Zuñiga said the decision to raise anew the reserve requirement ratio was made to put in check the additional pressure brought about by strong foreign exchange inflows on inflation.

“For this reason, the Monetary Board’s decision to raise the reserve requirement anew is a forward looking move to better manage liquidity,” he told reporters.

Latest data from the BSP showed that domestic liquidity or M3 grew eight percent to P4.261 trillion as of end-May from P3.945 trillion as of end-May last year as monetary authorities continued to closely monitor the amount of liquidity in the financial system to curb additional inflationary pressures.

M3 is the amount of money circulating in the domestic economy. Liquidity growth is one of the important vehicles considered in determining the central bank’s monetary policy. At a time when the economy is booming and money supply is expanding rapidly, the central bank would normally step in to mop-up in order to ensure that inflation would not surge.

“The Monetary Board is of the view that sustained foreign exchange inflows, driven by upbeat market sentiment over brighter prospects for the Philippine economy, could fuel a further acceleration of domestic liquidity which cou.ld pose risks to future inflation,” he warned.

He pointed out that the prudent increase in the reserve requirement would help ensure that the inflation target of three percent to five percent would be met.

De Zuniga said the policy rate setting body took into consideration the strong momentum of domestic economic activity, stable financial conditions and the double-digit growth in bank lending since January this year.

Bank loans posted its fastest growth in 25 months after expanding 18.8 percent to P2.544 trillion in May due to increased domestic economic activities. Loans have been growing steadily at double-digit rates of 11 percent in January, 12.3 percent in February, 14.1 percent in March, 14.2 percent in April, and 18.8 percent in May.

According to him, the central bank believes that risks around the inflation forecasts remain skewed to the upside suggesting a need for caution in the monetary policy stance.

“The Monetary Board’s decision is based on its biew that prevailing price and output condition support maintaining current policy setting. Latest baseline forecasts showed a lower path consistent with the three percent to five percent inflation target range for 2011 and 2012 while inflation expectations remained well contained,” de Zuniga said.

Inflation rose to a 26-month high of 4.6 percent in June from 4.5 percent in May but the BSP and the market were expecting consumer prices to breach the higher end of the central bank’s 3.0 percent to 5.0 percent target. Inflation averaged 4.3 percent in the first half of the year from 4.2 percent in the same period last year.

For her part, BSP assistant governor Cyd Tuano-Amador said monetary authorities decided to lower its inflation forecast to 4.7 percent instead of 5.06 percent this year and to 3.74 percent instead of 3.9 percent next year due to lower than expected inflation for June and May as well as the softening of oil prices in the world market.