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Benign inflation gives BSP more room to keep rates at record lows

- Lawrence Agcaoili () - September 11, 2010 - 12:00am

MANILA, Philippines - Economists and analysts are convinced that the benign inflation has given monetary authorities enough elbow room to keep its key policy rates at record lows at least until the end of the year.

American banking giant Citigoup economist Jun Trinidad said in a daily note that the Bangko Sentral ng Pilipinas (BSP) has enough flexibility to keep its policy rates steady as inflation would correct in the fourth quarter after a slight uptick in the third quarter of the year.

The BSP slashed its key policy rates by 200 basis points during the height of the financial crisis in the US in December 2008 and July of 2009 but introduced several liquidity-enhancing measures to cushion the impact of the global economic meltdown. It has kept the rates steady since July last year but has withdrawn almost all of the crisis-related measures.

This brought the overnight borrowing rate to a record low of four percent and the overnight lending rate at six percent.

Last August 26, the BSP kept its key rates at record low for 10th consecutive policy-setting meetings since July last year on the back of benign inflation outlook despite the stronger-than-expected gross domestic product (GDP) growth in the first half of the year.

Trinidad said the surprising GDP growth in the first half of the year could ignite faster inflation pressures in 2011 prompting monetary authorities to adjust its key policy rates.

The country’s GDP grew by 7.9 percent in the first half of the year from 1.2 percent in the same period last year. The Philippines barely escaped recession last year after its GDP grew by 1.1 percent from 3.8 percent in 2008 due to the full impact of the global financial crisis.

For his part, Philippine Equity Partners Inc. analyst Jojo Gonzales said the benign inflation justifies the accommodative policy stance of the BSP until the end of this year.

“These suggest no meaningful acceleration in consumer prices which justifies the current neutral stance of monetary authorities. Although there may be some observers saying policy rates may be hiked 25 basis points in the fourth quarter, this looks highly unlikely with no obvious upward pressure on consumer prices,” Gonzales stressed.

Earlier, BSP Governor Amando Tetangco Jr. hinted that it is possible for monetary authorities to keep its key policy rates unchanged at record lows this year despite the stronger-than-expected economic growth in the first half as well as the benign inflation outlook.

“Yes it is possible provided that there are no major events that can lead to a significant change in the inflation outlook,” Tetangco stressed.

Apart from keeping its key policy rates unchanged, the BSP also decided to further put on hold further withdrawal of liquidity enhancing measures.

BANGKO SENTRAL BSP GOVERNOR AMANDO TETANGCO JR. INFLATION JOJO GONZALES JUN TRINIDAD LAST AUGUST PHILIPPINE EQUITY PARTNERS INC POLICY RATES YEAR
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