Monetary authorities prepare for shift to new interest rate setting scheme
CHANGES in the monetary settings will have to wait until next year as the central bank prepares for a change in the way policies are adjusted.
Economic growth also remains healthy, while inflation has remained benign, confirming the assessment that the current interest rate settings are appropriate, Singapore’s largest bank said.
“The Bangko Sentral ng Pilipinas (BSP) plans to introduce a new interest rate corridor and hold weekly auctions for term deposits in the second quarter of 2016,” DBS economist Gundy Cahyadi said in a note this week.
“No policy rate move is likely to happen before the shift to the new corridor,” he said.
This projection comes ahead of the BSP Monetary Board’s rate-setting meeting next Thursday. Benchmark interest rates are set by the BSP based on its assessment of inflation and growth dynamics.
The BSP’s main goal is to protect consumers’ purchasing power by keeping prices stable. Rates are hiked to curb demand when inflation heats up, while rates are slashed to spur demand and prop up prices.
The corridor system calls for a shift to the use of floor and ceiling rates for short-term financing. To keep rates in between these two preset rates, the BSP intends to conduct weekly auctions for term deposits. These auctions would be done every Tuesday starting the second quarter of 2016.
Improving the potency of monetary policy settings, which control liquidity levels and inflationary pressures in the country, will be the main goal of the shift to the use of an interest rate corridor.
“Beyond that, given that inflation is on course to meet target and gross domestic product (GDP) growth remains strong, we think the BSP may tighten its policy stance once again in the second half of next year,” Cahyadi said.
In November, inflation stood at 1.1 percent, faster than the level in September and the record low of 0.4 percent in October.
“The BSP remains focused on long-term GDP growth sustainability. On this front, managing excess liquidity continues to be a policy priority,” he said.
Benchmark overnight borrowing and lending rates set by the BSP stand at 4 and 6 percent, respectively.
The uptick in inflation in November was a result of higher utility rates and food prices, government data showed. Despite the acceleration last month, inflation for the year is still expected to stay below the government’s target of 2 to 4 percent.
Last week, Tetangco said the BSP was closely watching developments overseas and their effects on domestic markets. Apart from the US Fed’s much-awaited hike, the European Central Bank (ECB) recently slashed rates less than expected. Meanwhile, China’s currency, the yuan, was recently allowed to move in line with market forces, thanks to reforms implemented by Beijing earlier this year.
Shifts in interest rates can affect the flow of cash in and out of emerging markets like the Philippines. For instance, the Fed’s rate hike will attract more money into the US, while rate cuts in Europe may push investors to seek higher yields outside the continent.
“We will see how the balance of this, the possible US lift off this month and further moves from Chinese authorities, would impact on domestic price and growth dynamics,” Tetangco said in a previous statement.
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