IMF says BSP still has room for further easing

MANILA, Philippines - The International Monetary Fund (IMF) said the Bangko Sentral ng Pilipinas (BSP) should stop easing its monetary policy only when the country’s economic recovery has reached solid footing, saying there is still moderate scope for further monetary easing.

Because the economy is slowing down and the inflation rate is projected to continue coming down, the IMF said in its recently-concluded mission that monetary policies should be directed towards supporting growth.

Releasing funds into the system normally had the impact of supporting economic activities because financing business become cheaper than usual and banks become more willing to lend.

In an effort to keep the economy from slipping into recession, the BSP has so far reduced interest rates by 175 basis points and undertook other monetary measures that released over P500 billion into the local financial system.

“Timely and decisive measures by the BSP ensured adequate liquidity conditions conducive to growth, consistent with the inflation-targeting framework,” the IMF said.

According to the IMF, it projected the inflation rate to decline to 3.25 percent this year and rise to 4.25 percent in 2010.

IMF mission leader Il Houng Lee said, however, that the BSP has more limited room for monetary policy easing this time around, especially since the economy is projected to grow by 2.5 percent in 2010 after declining by one percent this year.

“An exit from the easier monetary stance should commence only when the recovery is on a solid footing,” Lee said.

BSP Governor Amando M. Tetangco Jr. said as much, explaining that while the BSP is still firmly in its easing cycle, it would have to begin considering how it would unwind the accommodative monetary policy regime.

There have been talks of ending the easing cycle and starting to consider an exit strategy that would unwind the steady relaxation of monetary policy settings that have so far released over half a trillion pesos into the system since December 2008.

But Tetangco said easing is more likely to continue although admitted that monetary officials are looking more closely at key indicators, specifically the growth in money supply and the distribution of credit.

“We are also looking at the behavior of credit and where it is going,” Tetangco said. “So far we are seeing a healthy flow into the productive sectors of the economy.”

The market has been calling for a possible reduction in the reserve requirement of banks but Tetangco said liquidity growth needed to be assessed. While he would not rule out the possibility of an adjustment in reserve floors, he said numbers suggested ample money supply.

“So far we’ve seen that there’s sufficient liquidity in the system,” Tetangco said. Despite the slowdown in credit growth, Tetangco said the BSP still considered it a “good pace of credit expansion” considering the pace of the country’s economic expansion amid a global recession.

Tetangco said the growth in credit indicated that there is continued economic activity and the demand for money is growing.

Tetangco said a reversal of the BSP’s easing cycle could only be triggered by a surge in the inflation rate and even then, only if that surge would push the projected inflation to the higher end of the expected range for the year.

Even economists have lowered their projected average inflation rate from 4.5 percent to four percent, falling within the government’s official target inflation of 3.5 to 5.5 percent. The BSP said its survey indicated an average forecast inflation rate of 3.9 percent in the second quarter and 1.7 percent for the third quarter.

Tetangco there were also initial signs of improvement in the ravaged economies of the US and Europe and this could indicate the start of a global recovery.