The Monetary Board today decided to raise the BSP policy rate by 400 basis points effective Friday, 13 October 2000 to keep the interest rate differential between domestic and foreign interest rates from further narrowing. To support this interest rate measure, the Board also decided to increase by another 2 percentage points the liquidity reserve requirement for commercial banks and 1 percentage point for thrift banks effective 20 October 2000.
The Monetary Board recognizes that the recent movement of the peso has been driven by both fundamental and non-fundamental factors. With the right focus, monetary policy can and should address fundamental factors.
Today, the peso has breached the P48 to a dollar level. Aside from non-fundamental political factors driving the peso down, we have also observed that the interest differential has further deteriorated against peso-denominated assets. As reported in the press today, domestic and foreign investors are buying dollar-denominated Philippine papers with varying tenors of 5, 7 and 10 years. As a result, the spreads over the benchmark US Treasuries have widened significantly. This dollar-demand increasing activity has further worsened the pressure against the peso.
This adjustment represents only the premium for investing in Philippine papers. The Monetary Board strongly feels that positive action has to be done to address the fundamental reality of narrowing interest rate differential.
A large misalignment of the peso with the level justified by fundamental forces is bad for business, bad for both domestic and foreign investors and bad for the entire economy and long-term prospects.
Meanwhile, the adjustment on the liquidity reserve requirement is expected to limit the peso liquidity of banks, some of which we have observed to be increasingly channeled to the foreign exchange market. This latest adjustment should continue to have little impact on bank lending rates considering 1) the still ample liquidity obtaining in the system and 2) the market interest rates that the banks will earn from the government securities they will buy to comply with this requirement.
The BSP shall continue to monitor the developments in financial markets in the Philippines and abroad to ensure that exchange rate movements remain consistent with fundamental trends. It shall undertake stabilization policies necessary to promote orderly foreign exchange market activities as a key to sustained economic growth.