MANILA, August 29, 2003  (STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) decided yesterday to keep its key policy rates unchanged but tightened monetary policy mildly by scrapping a tiering system to lure banks to park funds rather than speculate on the currency.

Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura said the MB decision to mop up liquidity was a "preemptive measure" to ease inflationary pressure created by the weakness of the peso against the greenback.

"As a preemptive measure to prevent BSP scraps adverse changes in inflation expectations, the Monetary Board decided to remove the three-tiered system for banks’ placements with the BSP," Buenaventura said.

Despite the peso’s recovery, the market remains wary over the July 27 mutiny by rogue troops, rumors of another coup attempt, graft allegations against President Arroyo’s husband and political uncertainty before next May’s election.

Analysts said the Monetary Board’s decision was largely within market expectations, as players had been betting that the BSP would use any of its monetary tools to ensure exchange stability.

"The Monetary Board felt that persistent large daily movements in the exchange rate might serve to raise these inflation expectations," Buenaventura said. "So we decided that all bank placements with the BSP would be accepted at a flat rate of 6.75 percent."

Previously, the tiering scheme applied a 6.75 percent interest on placements of up to P5 billion. Placements in excess of P5 billion up to P10 billion will earn an interest of 3.75 percent while placements in excess of P10 billion will have an interest rate of 0.75 percent.

Effective yesterday, Buenaventura said the overnight reverse repurchase (RRP) transactions with the BSP would be accepted at a flat rate of 6.75 percent while term RRPs and special deposit accounts with the BSP would be paid the published rates for corresponding tenors such that the rate would be at a certain spread over the overnight RRP rate.

However, Buenaventura said the situation did not require a reduction in the actual policy rates of the BSP and these would be maintained at 6.75 percent for the overnight borrowing rate and nine percent for the overnight lending rate.

Buenaventura said keeping overnight rates steady would help ensure "adequate liquidity to support growth in demand while guarding against future price risks."

The BSP chief also said the move is expected to mop up at least P10 billion from the system, enough to preempt inflationary pressures resulting from the weakening of the peso against the dollar.

He said the MB decision also factored in the slowdown in the country’s gross domestic product (GDP) for the second quarter which was lower than expected at 3.2 percent.

"We took these factors in consideration because we wanted to make sure that interest rates would not unduly burden the economy and ultimately discourage growth," Buenaventura said.

But the BSP chief admitted that the first semester GDP performance would make it harder to achieve the high end of the target growth range for 2003.

"For the economy to grow at least 4.2 percent, the second semester growth should be at least 4.5 percent," he said.

Reported by: Sol Jose Vanzi

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