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BSP says it can afford to keep key rates low

By: Michelle V. Remo, March 11th, 2013 04:43 AM

MANILA, Philippines—The Bangko Sentral ng Pilipinas continues to have the flexibility to keep interest rates low, according to BSP Governor Amando Tetangco Jr.

The central bank on Thursday will convene the Monetary Board for a policy rate-setting meeting.

Tetangco told reporters on Friday that consumer prices would remain manageable over the short term, enabling the central bank to maintain a low-interest rate environment.

“We can afford to keep interest rates low,” Tetangco said.

Currently, the BSP’s key policy rates stand at historic lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

“The inflation outlook continues to be favorable. While there may be some slight uptick in inflation for January and February, this does not change the overall picture of a manageable inflation situation going forward,” he explained.

In a policy meeting held last January, the Monetary Board maintained record-low rates. Officials said the increase in consumer prices was expected to remain modest, allowing them to keep interest rates low to support economic growth.

But what the Monetary Board did last January was to reduce the interest rates on special deposit accounts (SDAs) to a uniform rate of 3 percent. Previously, the SDA rates were set above the overnight borrowing rate by different margins depending on maturity.

The BSP said that the reduction in the SDA rate—a move that would trim its expenses on interest payments—is meant to align policies in the country to best practices observed abroad. In many advanced and emerging economies, it said, interest rates offered through deposit facilities are set lower than the key policy rate.

In February, inflation inched up to 3.4 percent from 3 percent in January, and 2.9 percent in December. But the BSP noted that the average inflation for the first two months of the year, at 3.2 percent, is the same as the average reported during the same period in 2012.

Also, the surge in foreign capital inflows has elicited concerns over a buildup in inflationary pressures. The inflows are said to be adding up to the hefty liquidity circulating in the economy.

But so far, rising foreign capital inflows have not reached levels that can lead to a breach in the inflation target, Tetangco said. The inflation target is set at 3 to 5 percent for this year and the next.

“The impact of capital inflows on domestic liquidity has been manageable, and we have been able to contain liquidity growth to what is sufficient or to what is consistent with our growth and price objectives,” the central bank chief said.

Nonetheless, he added, the BSP is prepared to implement measures to ensure that the inflow of foreign capital will not destabilize the country’s economy.

Last year, the BSP revived a ruling prohibiting foreign funds from being invested in SDAs. It also issued a circular last week putting a cap on banks’ holdings of non-deliverable forwards. The measures are meant to temper the inflow of foreign capital.

The BSP earlier reported that gross inflow of foreign portfolio investments hit $2.8 billion in the first month of the year—over twice as much as the $1.2 billion registered in the same period of 2012.

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