BSP may keep rates but hike rediscount charge

The central bank is unlikely to touch benchmark interest rates at its meeting on Thursday, but may tweak liquidity tools as part of a plan to tighten monetary stance amid the recovering economy, investment bank Barclays Capital said. "We expect the [Bangko Sentral ng Pilipinas] to keep the reverse repurchase rate unchanged at 4 percent at the upcoming meeting given relatively contained inflation and a cautious outlook on growth," Barclays regional economist Prakriti Sofat said. She said the central bank would likely further raise the rate of short-term loans to banks under a rediscount facility and cut the budget for the lending, now at P60 billion. Last January 28, the central bank increased the rediscount rate to 4 percent in what appeared to be the start of policy tightening. The central bank slashed its key rates by 200 basis points between December 2008 and July 2009 to encourage companies to borrow for their expansion and stimulate the economy amid the global slump. Sofat said the central bank would likely start jacking up benchmark interest rates by 25 basis points in the third quarter and by another quarter of a point in the last quarter. Barclays expects the BSP’s overnight borrowing rate at 4.5 percent and its lending rate at 6.5 percent by the end of the year. "We continue to believe that the first 25-basis-point hike will materialize in [the third quarter]," Sofat said. In November 2008, the central bank cut the reserve requirement on bank deposits and tripled the volume of loans under its rediscount facility to lessen the effects of a US-led financial crisis on the economy. "However, we think [the] BSP will continue exiting from the emergency measures [meant to stimulate the economy] that were introduced during the crisis," the Barclays economist said. Earlier, BSP Deputy Governor Diwa Guinigundo said the timing of an exit strategy from an accommodative stance was one of the major risks that could derail local economic recovery. He noted that exiting too soon could hurt recovery, while exiting too late could lead to spiraling consumer prices and cause asset prices to spiral up and down. He said monetary authorities would be vigilant to ensure prices remained stable. The International Monetary Fund earlier urged monetary authorities to keep interest rates low to sustain the economic recovery. The government expects the economy to grow by 2.6-3.6 percent this year from 0.9 percent last year. — NPA, GMANews.TV