BSP leaves interest rates at record lows

MANILA, Philippines – The central bank left its key interest rates at record lows on Thursday, March 27, saying inflation was likely to stay within targets.

The Bangko Sentral ng Pilipinas (BSP) kept its overnight borrowing rate at 3.5% and the overnight lending at 5.5%.

It also kept the rate on its short-term special deposit account (SDA) the same, but raised banks’ reserve requirement ratio by one percentage point to 19%.

“In deciding to maintain its policy rates, the Monetary Board noted that future inflation path is likely to stay within target ranges of 3-5% for 2014 and 2-4% in 2015,” BSP Governor Amando Tetangco Jr said in a statement. “Inflation expectations also remain broadly aligned with the target over the policy horizon.”

Tetangco said the decision to raise the reserve requirement was “intended to guard against potential risks to financial stability that could arise from continued strong liquidity growth and rapid credit expansion.”

BSP rates are banks’ benchmark in charging their loans. Low rates make loans cheap, encouraging consumers and businesses to borrow. Loans fuel spending and stir economic activity. Higher spending pushes consumer prices up.

SDAs are fixed-term deposits by banks with the BSP. These deposits were introduced by BSP as a way to manage liquidity. SDAs are usually higher-yielding than some instruments such as bonds. But when SDA rates are low, banks move their money and put it in other instruments with better yields, or extend more loans to clients.

The reserve requirement, meanwhile, refers to the proportion of banks’ deposits that they are required to hold as reserves. Raising this requirement forces banks to withhold a larger portion of their funds, reducing the supply of money in the financial system.

Some analysts said the central bank may first raise banks’ reserve requirement before touching interest rates or the SDA this year.

Earlier, Tetangco said interest rates remained appropriate but the room for keeping them steady was narrowing due to the uptick in consumer prices or inflation.

“What we’re saying is that room for maintaining policy rates is narrower now given that last year, we were at the low end of the (inflation) target range. This year we have the same target, but the forecast is above the midpoint of the range,” he has said.

Inflation stood at 4.1% in February, near the high-end of the 3-5% forecast for this year.

The Monetary Board is due to meet again to decide on interest rates on May 8. – Rappler.com