MANILA, MAY 3, 2007 (STAR) By Des Ferriols - Credit Suisse expects the Bangko Sentral ng Pilipinas (BSP) to start rolling back the tiering scheme and cutting its headline policy rate after the May elections.

According to Credit Suisse, its monetary policy is neutral but the investment bank said the lack of transparency in the conduct and communication of monetary policy is increasing interest rate volatility.

Credit Suisse said inflation should stay under three percent for most of 2007 as demand and supply pressures are expected to remain low.

"So far in 2007, the one-year Treasury bill rate has generally varied between 4.5-five percent, while the one-week money market rate has fluctuated between five to six percent," Credit Suisse said in an analysis of the BSPís options, adding that real interest rates have recently risen with the decline in inflation but remain within the "neutral" zone.

"We expect the central bank to begin simultaneously rolling back the tiering scheme and cutting the headline policy rate after congressional elections in May in a manner that is policy neutral or restrictive," Credit Suisse said.

Credit Suisse noted that less uncertainty over the direction of monetary policy, in turn, would likely lead to a flattening of the yield curve as market participants extend duration.

"The monetary policy stance is neutral and inflation risks are low, in our view, but the BSPís apparent discomfort with short-term yields leaves little scope for monetary easing and could induce more near-term tightening," Credit Suisse said.

At 1.5-2 percent, Credit Suisse said real returns on one-year Treasury bills were not excessively low, given ample liquidity conditions and strong demand for peso-denominated instruments.

The bank said real lending rates are also reasonably high and not far from the pace of real GDP growth "For the time being, there is minimal risk to inflation from the credit and exchange rate channels," Credit Suisse said.

The bank said the countryís credit growth remains below nominal GDP growth because of the low level of capital-intensive investment, weak credit demand, and the risk adversity of banks still burdened with a high level of non-performing assets.

Going forward, Credit Suisse said it expects the BSP to tighten monetary conditions by increasingly sterilizing its foreign exchange purchases or by introducing a new monetary instrument that helps to absorb liquidity non-bank financial market participantsí demand from which has been exerting downward pressure on short-term Treasury bill yields.

Credit Suisse said it does not expect the BSP to change its policy rate or the tiering scheme at its last meeting and instead believes the BSP is likely to begin simultaneously rolling back the tiering scheme and cutting the headline policy rate.

Credit Suisse said this might happen in a "manner that is policy neutral or slightly restrictive." More likely, the bank said the BSP would eliminate the tiering scheme altogether by end-2007.

Chief News Editor: Sol Jose Vanzi

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