Monetary Board keeps policy rates steady

Published on Thursday, 13 December 2012 20:19

Written by Jun Vallecera | Reporter

Monetary authorities have determined that the economy does not need as much fiscal or monetary-policy support as it did in the recent past and, for this reason, kept its policy rates steady for the first time on Thursday after having slashed it four times in succession.

The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), meets every six weeks to determine whether interest rates were low enough to encourage lending or too high as to cause prices to fly, for instance.

With growth measured as the gross domestic product (GDP) having accelerated to 7.1 percent in the third quarter and inflation sufficiently benign as to fan positive inflation expectations down the line, the BSP kept the rates at which it borrows from or lends to banks steady where it was the past six weeks.

“There is very little need to provide the economy with more monetary policy support. Besides, there remains more space for prior policy adjustments to impact the lending rates,” BSP Deputy Governor Diwa C. Guinigundo said.

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BSP Governor Amando M. Tetangco Jr. formally announced the decision to keep the policy rates steady, saying the settings “remain appropriate as the cumulative 100-basis-point reduction in 2012 continues to work its way through the economy.”

“The latest baseline forecast follows a slightly lower path but remained within the lower bound of the target over the policy horizon.

“Risks to the inflation outlook appear to be evenly balanced around the baseline forecasts, with inflation expectations broadly aligned with the inflation target range,” Tetangco said.

He added that global economic activity, which has been weak since the global financial crisis started in 2007/2008, “has stabilized in recent months,” a positive development tempered only by the continued fiscal consolidation and financial market stressed in the advanced economies under the European Union and the US.

“Global economic prospects, therefore, are likely to stay subdued, thus mitigating upward pressures on commodity prices,” Tetangco said.

With local output accelerating on the back of strong domestic demand and buoyant business sentiment, he added that he was optimistic that remittance-driven liquidity and strong bank lending growth were to sustain the momentum that the economy has gained thus far.

On fears that the interest differential favoring the Philippines would serve to encourage even more foreign capital flows, Guinigundo said that greater liquidity levels should not be problematic as the country’s ability to absorb the foreign capital inflows and turn them around into something economically productive has expanded as well.

The fears have to do with rapid increases in liquidity levels in magnitudes enough to fan inflation and arrest whatever growth momentum has been achieved.

Guinigundo acknowledged that while inflows-driven liquidity is a threat to inflation, there are enough macro prudential measures that the BSP may mobilize as and when necessary.

As a practical result, the rate at which the BSP borrows from banks is still 3.5 percent and the rate at which it lends to banks, still 5.5 percent.