Monday, 8 June 2009

Philippine central bank prepares for exit from policy easing

Paolo Luis G. Montecillo

DESPITE KEEPING its bias for cutting interest rates, the central bank is already studying how it would reverse its current policy once the economy starts recovering.

The Bangko Sentral ng Pilipinas (BSP) said it is now being mindful of the impact of its accommodative policies — implemented since late last year — on inflation once economic conditions improve.

"At the moment, our assessment is that the risks to inflation are low, and we have room to ease further; being mindful, however, that liquidity does not become excessive," BSP Gov. Amando M. Tetangco, Jr. told reporters via e-mail over the weekend.

"[But] we have to be mindful that we have been easing since the fourth quarter of last year," he said, noting that interest rates would eventually have to be raised to make sure inflation pressures, expected later this year, do not disrupt economic activity.

"We also need to look at the medium term because, if there is a need to change the stance of monetary policy at some point in the future, that change or shift should be done in smooth adjustment," he added.

For the moment, however, he said monetary officials are still studying on how exactly to go about reversing its current policy.

"It will be unwise for me to characterize and compare any change in stance we will make against previous policy actions because the inflation process is dynamic, interrelationships of macroeconomic variables are not static and our policy framework is forward looking," Mr. Tetangco said. "The speed and timing of any change in our policy stance will depend on many factors, most importantly on the outlook for inflation."

Inflation pressures have, so far, remained subdued, despite the measures which should have been shoring up domestic demand and driving prices up.

The rise in consumer prices has steadily eased since its peak of 12.5% in August of last year, when oil and commodity prices spiked in world markets. Inflation eased to its lowest in 18 months to 3.3% in May from 4.8% in April, as fuel and utility prices dropped below year-ago levels.

The central bank has cut its policy rates by a total of 175 basis points since December last year, in a bid to reduce borrowing costs and encourage banks to lend. This brought the benchmark borrowing rate to 4.25%, the lowest since May 1992 when the rate stood at 4.125%.

Mr. Tetangco has also noted that cutting the BSP’s overnight borrowing rate, or the premium paid to banks that park their funds at the central bank, to a record low of 4% is in the "realm of possibility."

The BSP cuts rates to discourage banks from parking their funds at the central bank and instead, lend these to the public.

The BSP has also cut local banks’ reserve requirements by two-percentage points and tripled its rediscounting facility to P60 billion for more direct infusion of liquidity into the economy.

In a bid to provide an appropriate mix of monetary and fiscal measures to prod economic activity, BSP’s steps have been complemented by an increase in government spending by way of a P330-billion economic stimulus package for the year. The P100-billion infrastructure component of that package, however, has yet to be spent.

The Treasury bureau reported a 15.5% rise in total disbursements to 463.72 billion as of April, but the 0.4% gross domestic product growth recorded in the first quarter — which prompted some officials and analysts to warn that the economy was on the brink of recession — raised questions on how and where exactly that money was used.

To be sure, over a quarter of those disbursements were allocated for debt interest payments.

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