BSP hints resumption of rate hikes

THE Bangko Sentral ng Pilipinas (BSP) on Wednesday hinted it may resume its tightening cycle, possibly using both the policy rate and reserve requirement if liquidity continued to increase and threaten the inflation outlook.

BSP Deputy Gov. Diwa Guinigundo said the two successive hikes in key rates have resulted in a weak pass-through of around 46 percent, even as liquidity and bank lending continued to expand.

“It appears that market interest rates have been slow in responding to the previous policy rate adjustments, as the financial system remains quite liquid, and strong capital inflows have compressed yields. The Monetary Board is mindful that the strong liquidity in the financial system amid continued strong capital inflows could be blunting the impact of adjustments in the monetary policy stance on market interest rates,” Guinigundo said during a forum of the Economic Journalists’ Association of the Philippines.

Money supply growth accelerated to 8 percent in May from 7.3 percent in April, whereas bank lending, inclusive of reverse repurchase agreements, grew by 20.6 percent from 18 percent over the same period.

This was after the Monetary Board hiked policy rates by 25 basis points on March 24 and by a similar amount on May 5.

“These policy interest adjustments are intended to help minimize the overall impact of rising inflation on domestic economic activity by helping to firmly anchor the public’s inflation expectations,” Guinigundo said.

Despite successive rate increases, the policy-making Monetary Board during its June 16 meeting raised banks’ reserve requirement by a percentage point to counter any additional inflationary pressures from excess liquidity.

“An increase in the reserve requirement ratio also allows monetary tightening without encouraging short-term capital inflows. With the prevailing ample global liquidity, raising policy rates to counter inflation risks could attract even more capital inflows, thus introducing a policy dilemma,” Guinigundo said.

The Monetary Board is scheduled to meet again on July 28.

Nicholas Kwan, head of research at Standard Chartered Bank, however said that domestic liquidity is not a problem in the Philippines compared with its neighboring countries.

Bert Hofman, World Bank country director, agreed, saying that domestic liquidity was not excessive compared with Philippine peer countries such as Korea, China and Malaysia.

He said an improvement in the investment environment can address this liquidity problem.