MANILA, JULY 13, 2007
(STAR) By Des Ferriols - For the first time since 2005, the Bangko Sentral ng Pilipinas (BSP) adjusted its key policy rates downward yesterday but said its settings remained neutral as the Monetary Board (MB) also lifted the tiering scheme on bank placements.

This developed as the BSP projected the inflation rate this year to average between 2.6 percent and 3.1 percent, giving the MB even more room to swing its monetary tools around.

At its meeting yesterday, the BSP decided that effective today, the tiering system on placements with the BSP would be lifted and the BSP’s key policy interest rates would be adjusted to six percent for the overnight borrowing or reverse repurchase (RRP) rate and eight percent for the overnight lending or repurchase (RP) rate.

The BSP last adjusted its headline policy rates in October 2005 when the rates were increased to 7.5 percent for overnight borrowing and 9.7 percent for overnight lending.

The tiered rates, on the other hand, were introduced in November last year, supposedly to force banks to take their funds out of the central bank and lend them to borrowers.

BSP Governor Amando M. Tetangco Jr. said the removal of the tiering scheme and the adjustment in headline policy rates would also apply to placements in the special deposit account (SDA) facility of the BSP which he said would remain open to trust entities.

The surprise move was expected to have no effect on the effective monetary policy settings since one move was counterbalanced by the other, Tetangco said.

“This policy stance — which is neutral relative to future inflation and output — is consistent with the forward-looking orientation of inflation targeting,” Tetangco said. “We considered the low actual inflation and, more importantly, the benign inflation outlook over the policy horizon.”

With the latest projections, Tetangco said the inflation rate would fall below the four to five percent target range in 2007 and stay within the four percent plus or minus one percentage point target in 2008.

“We removed the tiering scheme because it has achieved what it was supposed to,” Tetangco said. “Lending has gone up to 12.1 percent and we can see now that banks are no longer the primary source of funding anyway.”

According to Tetangco, corporations have raised as much as P85 billion in funds by tapping the equities market as well as the bond market, indicating that the capital market was developing a more significant role in raising capital.

However, Tetangco said removing the tiering scheme would have the effect of tightening the monetary policy settings. “That’s why we decided to adjust the key policy rates,” he said. “We want the measures to remain neutral as far as our inflation targeting is concerned.”

Tetangco said the MB’s assessment of the recent data indicated that the BSP’s mopping up operations that started in early May 2007 have begun to have the desired cooling effect on liquidity conditions.

“Meanwhile, there are indications that the tiering scheme that has been in effect for the past eight months has had a beneficial impact on bank lending to the productive sectors of the economy,” he said.

At the same time, Tetangco said the Monetary Board observed that the continued broadening of financial markets means that non-bank sources of financing are becoming increasingly available to the corporate sector, thereby reducing the reliance on bank lending.

“The Monetary Board believes that the neutral stance of monetary policy is appropriate given moderate demand pressures, favorable supply conditions and manageable inflation expectations,” he said.

According to Tetangco, yesterday’s two-sided action would keep the MB’s flexibility in the absence of a clearer direction on potential risks, such as liquidity, wage pressures and oil prices.

Chief News Editor: Sol Jose Vanzi

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