Steady inflation augurs well for RP policies

Because of a stable inflation outlook and a domestic economy on the way to recovery, keeping the current monetary policy is just "appropriate," monetary authorities said. "The direction is really to tighten the monetary policy, but this is not yet the time to do it. Given all the developments, the monetary policy remains appropriate," said Diwa Guinigundo, deputy governor of Bangko Sentral ng Pilipinas (BSP). The Monetary Board, the Bangko Sentral’s policy-setting body, is scheduled to meet next July 15 on whether to keep its key policy rates unchanged or make some necessary adjustments. The BSP slashed its key policy rates by 200 basis points between December 2008 and July 2009 to cushion against the impact of the global economic meltdown. This brought the overnight borrowing rate to a record low of 4 percent and the overnight lending rate to 6 percent. Monetary authorities decided to keep its key rates at record lows for eighth consecutive policy-setting meetings with the European debt crunch, the growing tension between North and South Korea, and the 7.3 percent growth of the gross domestic products in the first quarter of 2010. since The last adjustment was in July last year. Guinigundo said that the BSP already lifted most of the crisis-related measures, except for narrowing the reserve requirement for banks at 19 percent (from 21 percent). The need to turbo charge the system with liquidity enhancements has passed and the challenge now, according to Guinigundo, is timing the reduction of the banks' deposit reserves so that economic growth is sustained and inflation kept at bay. "We have since started the unwinding process or our exit strategy but for the anticipated cut in the reserve requirement," Guinigundo said. If that process is complete, household and corporate borrowers would have to contend with higher interest charges for domestic loans and there might be opportunities for those in need to look outside the Philippines for funding. "But there have been no such changes thus far. Given the developments, we still hold the same view and we still have the same outlook. Which means that the current monetary policy remains appropriate," he said. As for inflationary pressures, Guinigundo did not believe the P22 wage hike approved last month would work in conjunction with the tuition fee and power rate hikes to push inflation beyond the forecast range of 3.8 percent to 4.7 percent for June. "There is nothing that will raise the trajectory of inflation to a higher level," he said. The approved wage increase of P22 per day was lower than the numbers the BSP used in its forecast model and lower than the P75 per day proposed for adoption at the resumption of legislative sessions. Inflation transmitted through the exchange-rate mechanism was also ruled out, as the peso remained stable as did oil prices, he said. "So nothing is expected in the horizon to change the [inflation] outlook at this point," Guinigundo said. —Jesse, Edep/VS, GMANews.TV