The restoration of tiered rates on bank placements with the BSP has caused a stir in the market, with some analysts calculating that it effectively reduced rates by at least 200 basis points.
Analysts said this was much too drastic than if the Monetary Board had reduced its policy rates by 50 basis points when it met last November in the midst of a steadily appreciating peso.
According to BSP deputy governor Diwa Guinigundo, however, bank regulators were already beginning to see "some deceleration" in bank placements with the BSP, indicating that some liquidity was flowing back into the system.
"When the BSP did the tiering, it was because we wanted to make some funds available to the public for borrowing," Guinigundo said. "The inflation outlook was benign anyway so we did the tiering. But at the same time we were cognizant of the fact that there were still some risks to inflation so we did not touch our rates."
Banks argued that putting tiered rates on bank placements with the BSP did nothing to accomplish this and more could be achieved if the BSP instead lowered liquidity reserves.
According to Guinigundo, however, it would be unlikely for the BSP to address the liquidity reserve requirement when domestic liquidity growth has become a concern.
"Of course our ultimate objective is to bring these down, since both reserve instruments affect financial intermediation costs of banks," he said. "But if we did that, that could abet excess liquidity in the system."
Guingundo expressed optimism that people are starting to borrow, as indicated by the gradual growth in lending for the last three months.
"I think things are moving in the right direction even if moderately," he said.
Analysts have criticized the BSP’s reintroduction of the three-tier rates which they said was causing disruptions that would be ultimately counterproductive.
According to House appropriations committee chairman Rep. Joel Salceda, however, the reduction of the rates on bank deposits with the BSP had the effect of a more dramatic rate cut than if the Monetary Board had reduced its overnight rates.
Salceda, who is a close economic adviser to President Arroyo, expressed "surprise and disappointment" when the MB announced its decision to keep its policy rates steady but decided to lower the interest rates on bank placements with the BSP.
Analysts made the same estimate, saying that the move had the effect of reducing lending rates by about 170 to 200 basis points.
"That is too abrupt," Salceda said. "The direction is right but the speed is bad. A more unambiguous move would have been better, I didn’t expect the MB to behave so uniquely, at best."