BSP keeps policy rates unchanged

The Bangko Sentral ng Pilipinas (BSP) left its key policy rates unchanged, preferring to be more cautious and wait awhile to see if the downtrend in inflation level can be sustained for a longer period.

"We have to wait for clearer signals that inflation levels have taken hold," BSP Governor Rafael Buenaventura said yesterday.

The BSP’s overnight borrowing and lending rates are still at nine percent and 11.25 percent, respectively.

Buenaventura said that while the recent inflation level for May at 6.5 percent which is lower than the forecast of 6.7 percent provides scope for further monetary easing, "the more prudent approach at present would be to wait for information relevant to the inflation look."

"We also have to see the trend in energy prices, the level of liquidity in the system, and interest rate differentials," Buenaventura said.

The BSP chief added the monetary body is also looking at the outcome of the next US Federal Reserve Committee meeting on June 26 when the Fed reassess its monetary policy stance.

There are talks, however, that there is little elbow room for the US Fed to further cut rates because rates are already low.

The US Fed slashed interest rates by 2.5 percentage points this year to try and put the wobbly US economy on firmer footing. The key US Fed rate now stands at a seven-year low of four percent.

Despite this, there are fears that the US economy is bottoming out, and there would be no need to provide stimulus.

"The Board also noted that a forward-looking monetary policy stance recognizes the lag in the impact of policy actions on the economy and thus responds more to the inflation outlook than to contemporaneous inflation."

Buenaventura explained that since the latest policy rate cut by the BSP was done less than a month ago, the economy is just recently feeling the initial impact of the adjustment.

"The Board believes that maintaining rates at current levels will give more time for the recent rate cut to work its way on to monetary condition."

So far, the BSP which wants to keep a low-interest rate regime to spur more economic activities that hopefully would boost economic recover efforts, so far, has trimmed overnight borrowing and lending rates by a total of 600 basis points since December last year.

Earlier, Buenaventura said the BSP can slash key policy rates to as low as 8.25 percent within the year if downtrend in inflation levels continues.

"For us to bring down overnight rates to an average of 8.25 percent this year, the inflation average should at least average 6.25 percent and should even go down to as low as 5.5 percent," Buenaventura said.