BSP  HAS  MORE  FLEXIBILITY  WITH  U.S.  FEDERAL  DECISION

MANILA, DECEMBER 14, 2006
(STAR) By Des Ferriols - Monetary officials said the decision of the US Federal Reserve to keep its policy rates unchanged would give the Monetary Board some elbow room but the market saw no clear indication of what direction it would take.

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) is scheduled to meet today and hold its last monetary policy-setting session this year.

On the table for review are the monetary policy settings including the possible adjustment in the official policy rates or the lifting of the tiered rates on bank placements with the BSP.

However, BSP governor Amando M. Tetangco Jr. was only willing to say that the US Fed decision widened the BSPís elbow room to undertake monetary policy maneuvering in the light of the slowdown in inflation rate, rising domestic liquidity growth and lackluster lending activity.

"Right now, we are seeing a deceleration in the inflation rate and the expectation is that we will be well within the four-to five-percent target range for 2007," Tetangco told reporters. "We also have to look for other supporting developments that affect inflation."

Tetangco said the US Fed gave the Monetary Board additional elbow room but he did not give any indications of what course to take although the central bank chief has already said earlier that policy easing could be in the offing.

The reintroduction of the three-tier rates on bank placements had caused widespread confusion over what the BSP intended to do as it resisted touching its policy rates but essentially ended up cutting rates by 200 basis points.

Market analysts said the adjustment and 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.

"What they have done is too extreme," said an analyst from a foreign bank. "If they really wanted to compel banks to lend, they should have reduced the policy rates because that extends longer into the horizon."

According to Tetangco, on the other hand, the ultimate impact of the restoration of tiered rates would depend on the amount of placements that banks have with the BSP.

"The move to tier rather than cut was really aimed at encouraging banks to part with their large BSP placements and look for alternative investments," he said. "We wanted them to lend to the public more."

However, analysts pointed out that even the BSP made it clear the tiering scheme would be a temporary measure and could be lifted within the next three months.

"The longest period that the tiered rates were in effect was about 15 to 16 months," said the analyst. "But since the BSP has already said this one will not last long, what bank will bother to lend now when rates are down and they know they will go up very soon?"


Chief News Editor: Sol Jose Vanzi

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