BSP to hold rate despite Fed hike

The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), may still hold off on increasing its key overnight rate despite the 25-basis point hike in US interest rates.

Highly placed-banking sources said yesterday there is really no underlying reason for the Monetary Board to increase its overnight rate at this time considering the continued slowdown in inflation, a strong government cash position, a very liquid financial market, and a declining rate for the benchmark 91-day Treasury bill.

In fact, they warned that an increase may send the wrong signal, especially since the economy is still in the doldrums.

The sources said, however, that a further increase in US interest rates may finally create an upward pressure on local interest rates.

US Federal Reserve Chairman Alan Greenspan has been advocating an increase in US interest rates to slow down the overheating US economy.

Higher US interest rates would put pressure on the BSP to hike its own interest rates to keep the market from abandoning the peso in favor of the dollar or dollar-denominated financial instruments.

The economy, however, has not been performing well in the past few months and a high interest rate regime would only result in a further slowdown in investment and productive activity.

According to the Bangko Sentral ng Pilipinas (BSP), loan demand has not picked up and jacking up interest rates would only result in a further negative growth in loans.

Sources said the market had basically discounted the second round of increase in US interest rates, resulting in the slight decline in the 91-day T-bill rate.

For the medium term, the local financial market still expects interest rates to eventually pick up since government still plans to borrow domestically to fund its expenditures.

Earlier, Finance Secretary Jose T. Pardo said the government plans to borrow again from the international capital market in the third quarter of the year.