In its public information notice, the IMF Board of Directors underscored the importance of closely monitoring market developments arising from oil price hike and uptick in inflation.
The Fund favored any increase in BSP’s key overnight interest rate policy amidst the structural adjustments in reserve requirements to keep inflation at bay, fearing that if this is uncheck it could have negative domino effect on the country’s foreign exchange rate.
"Notwithstanding the recent increase in reserve requirements, they (referring to the IMF Board of Directors) considered that a case still does exist for tightening monetary policy to guide inflation expectations down," the IMF notice said.
The IMF, also, backed the relentless market monitoring by the regulators, which would guide them in policy-response decisions.
While a batch of government securities dealers aired a negative view on another interest rate hike, a foreign bank source believed there might be a need for another increase before the end of the year due to increase consumer spending.
Money circulating in the financial system is expected to increase during the last two and a half months of the year due to higher dollar remittances from overseas Filipino workers. This, in turn, will increase the purchasing power of the OFW beneficiaries due to the higher exchange rate.
"The BSP has shown it will not increase onite (overnight interest) rates if inflation is due to cost-push factors," the source said, adding, however, that this policy stance will change, altogether, with a demand-pull inflation.
The foreign banker explained inflation rate could go up due to demand-pull arising from heightened consumer spending during the Christmas season.
"This plus higher dollars remittances, this might lead to a demand pull inflation. As a check, it is possible the BSP could again increase onite rates for the third time this year," the source added.
Another monetary tightening will also maintain interest rate differential, which current stands at 3.5 percent, derived from the prevailing 7.25 percent overnight less the 3.75 percent US state fund rate.
"Although, this level is still healthy, it could deter foreign investments in local money borrowing rate of the BSP, particularly with the pronouncement of Greenspan (US Federal Reserve Chair Allan) that the US economy is over the hump already. Already, fund managers are going to the US market," pointed out the source.
The IMF board, too, raised this concern, thus the need for another rate hike.
"(The IMF) Directors were concerned that interest rate differentials were narrowing at a time when the Philippines’ risk premium may have risen due to political uncertainties, which could lead to a weakening of the exchange rate and further additional inflationary pressure," the IMF notice said.
Meanwhile, the IMF directors favored the extension of the sunset provisions of the Special Purpose Vehicle (SPV) Law, which provides incentives to banks and other financial institution using the SPV to unload the level of their loans that has turned sour at a discount.
The Fund noted the drop in the non-performing loan ratios of the banking sector because of their use the SPV. "Directors supported the authorities’ plans to extend the SPV framework."
"They also welcomed the privatization of the Philippine National Bank and recent acquisition announcements that would pave the way for necessary banking consolidation," the IMF notice stated.
On the other hand, the IMF cautioned against the non-passage of the amendments in the BSP charter, which would give the authorities more teeth supervising and regulating the banking system.
"Directors expressed concern that the amendments to the central bank’s charter, which are critical to strengthening bank supervision, are still pending in Congress, and stressed the need for early approval," the IMF said.
