Inflation-targetting has served RP well, BSP says

Written by Jun Vallecera / Reporter

Sunday, 29 March 2009 21:44

Monetary policy crafting under the inflation-targeting mode has served the country well, enabling the economy to grow on sustained basis each year while stabilizing prices, the Bangko Sentral ng Pilipinas (BSP) said on Sunday. According to BSP Governor Amando M. Tetangco Jr., recognition by global credit rating firm Standard and Poor’s on the impact of inflation targeting on money and credit developments in the Philippines, for example, may be seen in its decision affirming the country’s credit outlook as “stable.” “The current credit-rating outlook on the Philippines by S&P as stable is supported by our healthy external liquidity position, effective monetary policy engendered by the strong discipline of inflation targeting, as well as a stable and sound banking system that has, so far, withstood the current global financial turmoil,” Tetangco said in an e-mail. Most other sovereign regimes that include some of the most advanced economies of the world have received either a downgrade to their basic credit standing or unfavorable change to their credit outlook in the months following the US subprime-mortgage meltdown that has thrown the global economy into recession. Manila, on the other hand, has maintained its subinvestment status as a double B negative-rated country (BB minus) under the S&P system of sovereign credit ranking where the triple A plus, or AAA+, is the highest possible rating. The triple B grade, or BBB, is considered the minimum grade or threshold alerting potential creditors that a particular sovereign is a good borrower. Manila adopted the inflation-targeting approach to monetary policy in 2002 when inflation averaged just 3 percent from 6.8 percent a year earlier. This approach requires the BSP to announce in advance the likely path of inflation over a two-year stretch and crafts monetary policy on this basis instead of setting goals on the basis of monetary aggregates like in the past. According to Tetangco, this approach has allowed the BSP to ensure “appropriate [domestic interest rate] levels” and help make possible “the even distribution of liquidity in the system for the efficient functioning of credit markets in support of economic growth.” This basically pertains to the reduction in policy rates a total of 125 basis points since December last year that made possible the cheaper cost of credit and hopefully greater economic activities consistent with sustained growth. This cumulative reductions made possible the entry of an estimated half-a-trillion pesos worth of liquidity, helping fuel growth this year seen ranging from 3.7 percent up to 4.4 percent in terms of the gross domestic product, according to Tetangco. He said this much money entering the financial system was made possible not only because they cut the central bank’s policy rates but also because of such other measures as the threefold increase in the BSP’s rediscounting budget to P60 billion, the 2-percentage-point cut in the banks’ deposit reserves that released another P60 billion plus the positive liquidity impact of the US dollar-repurchase facility. Tetangco said such normally inflationary measures have been carefully calibrated to push local output within target this year, and thus far the numbers show these have been gobbled up by the various economic players all wanting to achieve higher output against a backdrop of the global economic downturn.