Monetary authorities hinted yesterday that they are done with moves to raise policy rates this year, after adjusting key rates three times in past months.
Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said adjusting interest rates now may be unnecessary taking into consideration requirements of the economy in the next fifteen to 22 months. "We need to look at the inflation outlook for 2007 because of the lag in policy."
The Monetary Board decisions are now based on 2007 inflation outlook, which Tetangco said will "drop too steeply" if policy actions are taken next week, for example raising key rates by another 25 basis points.
"From around eight percent this year, projected inflation were to fall too steeply in 2007, ranging from four percent to five percent," he told reporters on his way an MB meeting. "It probably makes more sense to have a more gradual decline in the inflation rate," Tetangco added.
Monetary action normally requires 15-21 months to take full effect on inflation and policy measures undertaken now will help address the risks to inflation and inflation expectations in the coming year and in 2007.
At the moment BSP rates are 7.5 percent for the overnight borrowing or reverse repurchase rate and 9.75 percent for the overnight lending or repurchase rate to keep inflation outlook intact and as a check against rapid liquidity growth.
The central bank moved its key rates three times this year and the last was in October. In July the MB also adjusted the reserve requirements of banks to mop up excess liquidity.
Tetangco said earlier that the latest scenarios suggest a "possible breach" of the inflation target of 45 percent for 2007 because of the second-round effects coming from supply-side pressures.
"An added concern is the continued rapid growth in domestic liquidity," he added. Broad money or M3 continues to exceed BSP comfort level of 13 percent growth on a monthly basis.
The BSP said the financial system remains very liquid despite the recent increase in the policy rate and the reserve requirements and that the "additional liquidity in recent months has been fueled by both foreign exchange inflows and by the deposit generations activities by banks." (LCC)
