BSP to keep interest rates low

BSP Governor Amando M. Tetangco Jr.: Confident. INQUIRER FILE PHOTO

The central bank will resist pressures to increase interest rates to keep foreign money from leaving the country, saying the Philippine economy had the legs to weather the current storm rocking Asia’s financial markets.

Governor Amando M. Tetangco Jr. of the Bangko Sentral ng Pilipinas (BSP) said monetary authorities would rather keep policy rates at their current levels rather than react to the current volatility in financial markets, which are considered a temporary setback.

“The Philippine fundamentals are solid and we have built up safeguards to ride out the volatilities,” Tetangco said on Wednesday. “There is no need for us to deviate from our current policy stance.”

He admitted that further “refinements” to some policy tools might be done, but only if needed. At its last policy stance meeting, the Monetary Board that Tetangco chairs kept overnight borrowing, lending and special deposit account (SDA) rates at record lows.

But prior to that, the BSP restricted the access of retail investors to the SDA window, which was originally a tool meant to stem rising prices by mopping up excess liquidity from the system. With interest rates at record lows, however, local banks parked money in SDA accounts, which had higher yields than government securities.

Earlier this week, the BSP said it would not implement capital controls to keep foreigners from divesting from the Philippines as investors start leaving emerging markets due to the expected recovery of the US economy.

This capital flight has caused the stock market to slide 20 percent from its recent record highs, putting it in so-called “bear territory.” The peso also sharply depreciated last week to its lowest level in more than a year.

Tetangco said the BSP would allow the market to determine the peso’s value, stepping in through the central bank’s open-market operations only to smooth out spikes in the currency’s movement.

He said this was in line with the BSP’s policy of working toward a business environment that helps businesses and consumers plan for the medium and long term.

“In the near term, however, we look to you (market players) to help mitigate market volatility,” Tetangco said.