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BSP warns of tighter money policies to stem peso slide |
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(09 February 2004, Monday - Philippine Daily Inquirer)
By Clarissa S. Batino THE Philippine central bank said it could raise overnight rates or hike banks' reserve requirement some more if the weakness of the local currency would persist. |
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The Bangko Sentral ng Pilipinas (BSP) would also use stronger moral suasion on banks to make sure they tow the line, according to BSP Deputy Governor Amando Tetangco Jr.
Bankers said the local currency would stay volatile because the factors that have dragged the peso down in the first place--political uncertainties and a shortage of dollars in the spot market--have not been addressed. "The Monetary Board is prepared to take additional policy action to make sure orderly financial conditions are maintained and price stability is achieved," Tetangco said in an interview. As demand for dollars build up toward the end of the month, traders said the peso could again fall to 56.20 to a dollar or even lower in the coming weeks. But BSP managing director Diwa Guinigundo said the bank reserve increase should stabilize the peso below the 56:$1 level. "Increasing policy rates is an option but there is no compelling reason to do it now. The (Monetary) Board chose to hike the reserve rather than the overnight rates because it is difficult to hold on to a rate hike without affecting growth. The BSP is adopting a calibrated approach to the problem of a volatile peso," Guinigundo said. The policy-making Monetary Board of the BSP jacked up by two percentage points the banks' reserve requirement on deposits and deposit substitutes to 19 percent effective Feb. 6 to siphon off about P30 billion in excess liquidity from the system that could have been used to speculate against the peso. The BSP overnight rates are currently at 6.75 percent for borrowing and 9 percent for lending. The key policy rates were last adjusted on July 2, 3003, after the Monetary Board decided to reduce these by 25 basis points. But this year, monetary authorities were likely to raise the rates to keep the inflation average within the 4-5 percent goal. In January, inflation based on 2000 prices already stood at 4.1 percent. "The market corrected after the BSP announced a reserve hike not because of the increase in reserves but because of the signal that the central bank sent that it would take action if the situation worsens," said a treasury official from a foreign bank. "But the specific action of raising reserves is not going to do much because it does not solve the problem of why there is shortage in dollars in the spot market, why people wanted to buy dollars and why those with dollars do not want to sell. So given this, last week's correction is only temporary," the banker added. Guinigundo said that the impact of a reserve hike could take time. He also admitted that factors like political jitters could still pull down the local currency. Tetangco said the reserve increase last week was a preemptive action because if the trend of a weaker peso continued, the inflation would go beyond the government's target this year. home | latest news |
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