BSP likely to keep current interest rates, say groups

MANILA, Philippines—The Bangko Sentral ng Pilipinas will likely keep interest rates at current levels throughout the rest of the year as problems posed by the global economy make another rate increase imprudent.

This was the view of First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P) in the latest issue of their joint publication, “The Market Call,” where they said the central bank would not raise the reserve requirement on banks at least until the end of the year.

“Given the adverse effect of [the euro zone and US economic weakness] on growth, the Monetary Board is unlikely to raise policy rates or the reserve requirement for the rest of the year,” FMIC and UA&P said.

Earlier this year, the BSP raised its key policy rates by a total of 50 basis points and the reserve requirement on banks by 2 percentage points.

The key policy rates, which influence commercial interest rates, are now at 4.5 and 6.5 percent, respectively. The reserve requirement, which dictates how much banks must keep with the BSP as reserves, is now at 21 percent.

The moves are meant to temper growth of liquidity in the economy amid fears inflation could exceed the official ceiling of 3 to 5 percent set for the year. Higher interest rates dampen demand for loans, which can fuel consumption, while higher reserve requirement tempers growth of available money for lending.

But while inflation was the primary concern earlier this year, the same is no longer true this time, according to economists. With the help of the policy actions by the BSP, inflation averaged 4.3 percent from January to September and it is expected to stay below 5 percent until 2012.

They said the concern of policymakers now would be to ensure the Philippine economy would grow at a decent pace even with the dampening effects of the economic problems of Europe and the United States.

The problems reduce the capacity of the US and European economies to buy imported goods from emerging markets like the Philippines, thus dampening export earnings of the latter.

FMIC and UAP said stimulus initiatives must be done to boost growth of the domestic economy given the challenges posed by the external environment.

Given this backdrop, they said the BSP would keep interest rates and the reserve requirement at current levels because further increases could aggravate the impact of the external challenges on the domestic economy.

In the first half, the Philippine economy, as measured by the gross domestic product, grew 4 percent.