The Bangko Sentral ng Pilipinas increased key policy rates anew: the overnight borrowing (RRP) and lending (RP) rates by another 50 basis points effective today. This brings the BSP’s overnight borrowing and lending rates to 10.00 percent and 12.25 percent, respectively.
The policy rate adjustment is in further anticipation of the U.S. Fed’s tightening bias, a factor that domestic market players have already discounted as they continue to maintain long dollar positions. This will put local monetary policy initiative ahead of the U.S. Fed’s decision curve. The U.S. Fed, even after its May 16 decision, continues to hold the view that present risks are weighted mainly toward conditions that may generate heightened inflation pressures in the future.
To stem inflationary pressures in the U.S. economy, the U.S. Fed went on a tightening mode starting June 1999 and has since raised the Fed rate by a total of 175 basis points to 6.5 percent. This brought the U.S. overnight bank lending rate to its highest level in nine years. Meanwhile, prior to today’s hike, the BSP has raised its overnight RRP and RP rates by much less than this amount, or a total of 50 basis points and 75 basis points, respectively. This, in turn has resulted in a narrower differential between domestic and foreign interest rates, thereby increasing volatility in the country’s foreign exchange market as peso-denominated assets became less attractive to investors. Today’s rate adjustments which effectively widen the said differential are expected to help stem the outflow of foreign exchange.
The additional increase in the BSP’s policy rates is also a response to the potential build-up in inflationary pressures with the depreciation of the peso and clear signs of recovery in domestic demand. The latter is shown by new market information particularly showing significant pick-up in consumption and investment spending. This is reflected by such early indicators as the Monthly Integrated Survey of Selected Industries (MISSI), import growth, car sales, appliance sales, electricity sales, and PEZA and new economic zone investments.
The adjustment in policy rates is not expected to lead to increases in bank lending rates as the market remains liquid. This is reflected in the continued oversubscription in the short-term government securities market and the recent pick-up in base money growth. Moreover, loan demand, while increasing, continues to be weak. This assessment is shared by a large number of bankers who have indicated that they do not anticipate a hike in their lending rates. Some of them emphasized that their benchmark interest rate is the 91-day t-bill rate and unless this shows some significant movement, an increase in lending rates is unlikely.
The BSP will continue to monitor closely both external and internal developments, and will review and adjust its policy rates in accordance with the market situation, consistent with the objective of keeping inflation within the government’s target range of 5.0-6.0 percent in 2000. A low and stable inflation is an essential building block to strengthen and sustain the country’s economic recovery.