Higher interest rates a temporary measure, economic managers say

President Estrada’s economic managers assured businessmen yesterday that the government’s proposed policy of raising interest rates was only meant "to buy time" for the peso to recover against the US dollar.

In a breakfast forum hosted by the South Metro Journalists at the Ayala Alabang Country Club in Muntinlupa City, Finance Secretary Jose Pardo and Bangko Sentral ng Pilipinas (BSP) Gov. Rafael Buenaventura said the move would merely be a temporary measure to prop up the local currency, which has been battered by the strong performance of the dollar in the region and a raging political scandal at home.

"The temporary measure will allow the economy to stabilize within the next 60 to 90 days," Buenaventura said.

Pardo said he was hoping that pressure points from adverse political and economic issues will subsequently ease up.

Sources said the BSP is looking at another four to 10 percentage points increase in key overnight rates. The increase could bring the overnight borrowing rate to almost 25 percent from 15 percent, and the overnight lending rate to as high as 27.25 percent from 17.25 percent.

Higher interest rates raise both the reserve requirement and liquidity reserves of banks, preventing speculators from buying and selling dollars at a much higher rate.

Buenaventura and Pardo admitted that the jueteng scandal, which resulted in impeachment proceedings and a call for snap elections, has adversely affected the country’s economy.

"Perceptions abroad, as reported freely by the local and foreign press, have been quite damaging. We have to step in and calm down the market," Buenaventura said.

He pointed out, however, that the policy of raising interest rates is a "double-edged sword," which could cut both ways.

"While raising rates may stem the peso fall, this could also affect the fiscal situation of a cash-strapped government, making it more expensive to borrow from domestic sources, and at the same time crowd out private sector borrowers," the BSP chief said.

He explained that the regional currency crisis has prompted their policy-making body to take drastic measures. The peso closed at 48.740 to the dollar in Friday’s trading.

"We have to do these things because we have to buy time. Letting the peso fall further could cause panic which is a recipe for disaster," Buenaventura said.

Pardo said they estimate as much as P8 billion in additional costs to the economy per P1 depreciation against the dollar.