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BSP SEEN TO EASE MONETARY POLICY – BSP assumes ‘counter-cyclical’ stance

Posted by Gilmour Poincaree on November 2, 2008

First Posted 18:17:00 11/02/2008

by Doris Dumlao – Philippine Daily Inquirer

THE BANGKO SENTRAL NG PILIPINAS (the Philippine central bank) is widely expected to ease monetary policy either by reducing the reserve requirement or overnight borrowing rates, or changing the terms of the high-yielding special deposit account (SDA).

The central bank already is in position to take this step following the fresh interest rate cuts by the US Federal Reserve and other major Asian central banks, bankers said.

“You need to be counter-cyclical,” BSP Deputy Governor Diwa Guinigundo told reporters. “When the economy is on a downswing, monetary policy … and fiscal policy, must be expansionary. And you must have regulatory forbearance.”

Guinigundo went on to explain that during good times, high capital charges are the norm.

“During downswings of the economy, you can temporarily ease policy and regulatory framework,” he added. “In the same manner, when you are experiencing an upswing in the business cycle, you should tighten monetary policy, tighten regulation, so that no one will grow to be so exuberant that they will forget there’s a limit to everything.”

But Guinigundo said the central bank would likely adopt regulations only as needed by the domestic financial system.

“If you announce a big package, that means you have a big problem,” Guinigundo said.

The fresh half-a-percentage point interest rate cut by the US Federal Reserve last week is seen to benefit the domestic economy.

“The broadly expected Fed rate cut should be positive for the domestic economy,” BSP Governor Amando Tetangco Jr. said. “It paves the way for a tempering of the expected deep recession in the United States.”

According to Tetangco, the move will help “shore up confidence both on Wall Street and Main Street … and help temper the negative feedback loop from the financial markets.”

The BSP chief earlier directed the central bank’s research department to study a possible cut in the reserve requirement.

Monetary easing can free up additional liquidity that can help perk up a sagging domestic economy by putting more money in consumers’ pockets, as well as making available more funds for business expansion.

The odds that the BSP would soon ease monetary policy gained ground after the outlook on inflation was seen to improve.

Seven out of nine treasury officials from different banks said the BSP would likely free up additional liquidity, while two said the central bank would keep a neutral stance.

“For this year, the BSP will likely limit SDA terms to 14 days or less, maybe lower the reserve requirement by 1 percentage and, if liquidity still seems shy, lower the overnight borrowing rate by 25 basis points,” said Reevie Vergara of Land Bank of the Philippines.

The BSP’s overnight borrowing rate currently stands at 6 percent. It has raised this key interest rate by a total of 100 basis points since June this year as it battled sharply rising consumer prices that drove the country’s inflation to 17-year highs.

The reserve requirement is the ratio of deposits that banks are required to keep in a low-yielding facility at the central bank. Currently set at 21 percent, the reserve requirement is another tool used by the BSP to manage liquidity in the financial system.

Ramon Lim of Philippine National Bank said the central bank, against all odds, could bring the overnight borrowing rate down to 5 percent this year and further to 4 percent by the first quarter of next year.

“There will likely be no change on reserve requirement unless the SDA is depleted and cost of money is still high,” Lim said.

Jose Emmanuel Hilado of Rizal Commercial Banking Corp. said the BSP would likely slash its overnight borrowing rate by 25 basis points this year and also cut the reserves by at least 1 percentage point.

Roland Avante of Chinatrust Philippines Commercial Bank projected that the central bank would cut the reserve requirement by up to 2 percentage points and reduce the overnight rate this month. He expected the overnight borrowing rate to drop to 4.5-5 percent by next year.

CLICK HERE FOR THE ORIGINAL ARTICLE

PUBLISHED BY ‘INQUIRER.NET’ (Philippines)

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