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BSP to take action if peso falls sharply |
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The Manila Bulletin 08/02/2005
The Bangko Sentral ng Pilipinas (BSP) may have to adopt another monetary tightening if the weakness in the local currency persists with the peso breaching the psychological level of P56.45. Industry sources said the regulators have already warned banks of their plans to raise its key overnight interest rate should the peso depreciates anew. "It was hinted that they may increase overnight interest rates by two percentage points," industry sources said. Another source disclosed the BSP has also been using moral suasion to prevent banks from playing without underlying requirements in the spot. "After increasing the reserves and using moral suasion, the next option for the BSP is to hike the overnight rates, which have remained untouched for the longest time," a bank treasury official said. The peso closed P56.14 to a dollar yesterday, lower compared to P56.13 Friday, due to what authorities believed was due to end month requirements by corporate, mostly oil firms. Meanwhile, Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said the average inflation rate is expected to slow down to 6.5 percent by end-December this year based on monetary officials’ assumptions. Inflation has averaged 8.5 percent in the first half of 2005. This is well above the target of the BSP, which is 5-6 percent for the year. According to Standard & Poor’s Ratings Services in its July 29 report on the Philippine economic condition, the BSP raised its key policy rates by 25 basis points last April to check the rising inflation. In March inflation rate surged to 8.5 percent. The full-year BSP forecast in the meantime is 7.9 percent for 2005 and 7.5 percent next year and this includes the expanded value-added tax. "(With reformed VAT) we think inflation will peak March next year," Guinigundo said. At least three currency dealers said the peso could fall unless the monetary authorities exercise their power to tighten anew monetary policy. They, though, noted that the peso recovery could not take off substantially because of the purchases by the regulators at the spot market every time the local currency regains some of its lost value. The P56.45 is the psychological hurdle. This is the cap in the spot market. "The BSP is always in the spot when the local currency flirts near the psychological barrier," a currency dealer said. Some economists forecasted a toll on the economy, alternatively, affecting the value of the peso, should the political problem besetting the presidency continues. A couple of weeks ago, the BSP raised banks’ reserve requirement to prop up the peso. A bank treasury official opined the hike in the overnight rate by the BSP "is not only long overdue" because of external factors but is "also more acceptable than using the structural method of increasing reserve requirements." "The BSP may no longer afford to keep the present onight rate. The US Fed (referring to the Federal Open Market Committee chaired by Allan Greenspan) has continually increased its fund rate," the bank official said. |
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