BSP takes drastic steps to stem freefall of peso

In a desperate attempt to stall the peso’s freefall against the dollar, the Bangko Sentral ng Pilipinas yesterday drastically raised its overnight rates by four percentage points and further increased the reserve requirements of commercial banks.

The BSP also expanded the coverage of the currency risk protection program (CRPP) to help companies needing dollars, particularly local oil firms hit by the double whammy of rising dollar-based oil prices and a depreciating peso.

"This is in response to the volatility in the exchange rate and the possible effect on inflation," BSP Deputy Governor Amando Tetangco said after an emergency meeting yesterday of the Monetary Board, the policy making body of the BSP.

Currency watchers expect the tightening to provide only temporary relief for the beleaguered peso, which fell to a record low of 48.50 against the dollar yesterday due to a deepening political crisis over allegations that President Estrada received millions of pesos in payoffs from illegal gambling operators.

The President denied the allegations in a television appearance.

Effective today, the key overnight borrowing rate will rise to 15 percent from 11 percent. The overnight lending rate will increase to 17.25 percent from 13.25 percent.

The increase follows a one percentage point rise in the central bank’s overnight rates in mid-September.

That increase did not trigger higher bank lending rates, but some analysts fear a sustained period of higher interest rates could crimp a growth rate that is already one of Asia’s lowest.

In a related move, the central bank raised the reserve requirement of commercial banks to 16 percent from 14 percent, effective Oct. 20, to remove money from the banking system that could be used to speculate against the peso.

Earlier this month, the central bank raised reserves by two percentage points.

Shortly after the announcement of the rise in interest rates, offers for the dollar on the spot market went above P48, with the US currency averaging P47.824 in late trading.

Analysts expect the rise in overnight rates to trigger a sharp jump in Treasury bill yields at Monday’s weekly government securities auction, with the benchmark 91-day Treasury bill – used by banks to price their lending rates – yielding up to 12 percent from 9.392 percent at this week’s auction.

"This could pressure bank lending rates," said Abacus Securities Corp. analyst Jun Neri, adding that this could hurt economic growth. – Marriane go, AP