BSP DECIDES TO KEEP KEY RATES UNCHANGED AT 6.75%

MANILA
, April 16, 2004
 (STAR)
By Des Ferriols - Contrary to market expectations, the Bangko Sentral ng Pilipinas (BSP) decided yesterday to keep its policy interest rates unchanged at 6.75 percent for overnight borrowing rate and nine percent for overnight lending rate.

The BSPís policy rates were last adjusted on July 2, 2003 when they were cut by 25 basis points and the market has been abuzz with rumors that the Monetary Board was setting itself up for a rate cut soon.

The MB, however, noted there have been no indications of any surge in inflation, despite increases in world oil prices resulting in higher transport fares.

The BSP said the principal sources of risk to the inflation outlook are still cost-side factors that are outside the influence of monetary policy and, therefore, do not require action from the MB.

"The presence of inflation risks from sentiment-driven volatile movements in the nominal exchange rate implies that the policy stance should contain an element of caution," said BSP Governor Rafael Buenaventura.

Buenaventura said demand-side pressures would be subdued, indicated by double-digit unemployment rate and the remaining unused capacity in the manufacturing sector as well as the modest growth in exports and bank lending.

The absence of inflationary pressures, however, is a coin with two sides. On one hand, it indicates that supply factors are not affecting domestic prices because government has allowed the liberal importation of basic commodities.

On the other hand, it also indicates that economic activities have slowed down.

Buenaventura pointed out that there has been a slowdown in money and credit demand. The restrained pace of bank lending as well as the generally uneven character of the trends in other economic indicators, he said, also tended to suggest downside risks for the overall strength of economic activity.

Buenaventura said the BSP has already factored in the risks stemming from concerns over domestic political conditions which he admitted might influence the movements of the exchange rate and financial variables.

According to Buenaventura, there are concerns that the modest pace of money and credit demand as well as the generally uneven character of trends in other economic data could create downside risks to economic activity.

"Apart from the fact that there is spare capacity in manufacturing, the sizeable stock of non-performing loans in the banking system has also contributed to the subdued lending activity," Buenaventura said.


Reported by: Sol Jose Vanzi

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