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The Stance of BSP Monetary Policy

09.13.2000

“The Bangko Sentral ng Pilipinas (BSP) makes a decision to intervene in the foreign exchange market on the basis of its objective evaluation of developments that impact on the stability of the currency.  It maintains its independence while pulling the appropriate lever of monetary policy. This statement seeks to explain the moves of the Bangko Sentral since our intervention in the market on 6 September to establish a better understanding of monetary policy.”

“Contrary to impressions carried by media reports, the BSP tightened monetary policy in response to recent developments, particularly the peso depreciation and the rise in world oil prices which have potential inflationary impact. The peso declined to a low of P45.674/US$1 on 6 September, the day other currencies also dropped to their lows against the US dollar. On 7 September, crude oil prices reached a record high of almost US$35 per barrel.” 

“Pursuant to the BSP’s primary mandate of promoting price stability, the monetary authorities provided additional dollars in the spot foreign exchange market to improve market liquidity.  Without a corresponding increase in dollar supply, the peso could weaken considerably and this would drive inflation higher.  The BSP also increased its overnight policy rates to ensure that the narrowing interest rate differential between domestic and international rates is checked.  Otherwise, this could lead to increased capital outflows, which in turn may lead to further weakening of the peso and fuel higher inflationary expectation.”

“These measures are in line with the BSP’s forward-looking approach to monetary policy, which aims to head off inflationary pressures well before they emerge.”

“Monetary policy remains broadly supportive of economic growth objectives while keeping inflationary pressures at bay. The recent increase in key policy rates is not expected to induce a rise in bank lending rates given the continued ample money supply in the financial system.”

“We maintain that economic fundamentals remain strong. Indicators of business conditions continue to point to the further strengthening of the economy. GDP grew stronger than expected in the second quarter to yield a first-semester growth rate of 3.9 percent.  Commercial bank lending has steadily risen in the past five months, with a 5.4 percent growth rate in June. Bank lending to the manufacturing sector has also grown in the past eight months, registering an 8.9 percent increase in June. This has translated into increased manufacturing production, which rose in terms of volume, value and net sales in June.  Power sales by Meralco also continue to rise, with a growth of 8.3 percent in the first semester.  Car sales have been sustained, showing a rise of 20.5 percent for the January-August period.”

“These trends have contributed to an improved business outlook for the second semester.  The BSP survey of business expectations conducted in the first semester of 2000 also shows that the majority of respondents (46.1 percent) expect business conditions to improve in the second semester of 2000.

“The Bangko Sentral will continue to observe closely the developments in both the domestic economy and the external sector in order to guide the conduct of appropriate policy responses as may be necessary.”

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