Macroprudential tools to combat inflationary pressures — BSP

The Bangko Sentral ng Pilipinas (BSP) is considering macroprudential tools to counter inflationary pressures brought about by high prices and increasing liquidity amid expectations of sustained strong capital inflows due to slowing growth in advanced economies, particularly the US. BSP Governor Amando Tetangco Jr. told reporters on Monday that monetary authorities are also looking into setting up macroprudential regulations to manage the impact on inflation, the currency, and the economy — instead of only setting policy rates and taking other liquidity enhancing measures. In its narrower original sense, macroprudential analysis refers to the use of prudential tools with the explicit objective of promoting the stability of the financial system as a whole, not necessarily of the individual financial institutions within it such as banks. Such measures include enhancing the flexibility of the domestic currency, further building up foreign exchange reserves, and issuing bank regulations to deal with foreign inflows. Economists agree with the BSP that inflation could peak either in the third or the fourth quarter of the year. Tetangco said the BSP could adopt macroprudential regulations, or raise interest rates and reserve requirements of banks, to counter additional inflationary pressure from strong liquidity in the financial system. Interest rates, reserve requirements The BSP raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 to head off inflation worries due to rising oil prices in the world market, thereby bringing down the overnight borrowing rate to 4.5 percent and the overnight lending rate to 6.5 percent. The BSP-Monetary Board decided last Thursday to keep interest rates unchanged but raised the reserve requirement for banks by one percentage point to 20 percent effective June 24 to tap at least P38 billion worth of liquidity from the economy to counter additional inflationary pressures. Tetangco said the BSP had slashed interest rates by 200 basis points to a record low 4 percent for the overnight borrowing rate and 6 percent for the overnight lending rate. Daily NDF reports instead of weekly Latest BSP data show that the inflow of foreign portfolio investments or “hot money" surged 160 percent to $2 billion in the first five months of the year on the back of strong investments in shares listed at the Philippine Stock Exchange and peso-denominated government securities, after ‘heightened investor interest’ spurred a $7.9-billion buying spree of local shares and government securities from January to May this year. Tetangco said that under Memorandum Circular No. 28, all banks and trust firms must submit starting June 1 their non-deliverable forward reports daily instead of weekly so that the BSP can monitor more closely their currency deals with offshore investors and curb excessive volatility in the foreign exchange market. Banks and trust firms enter into NDF contracts to buy or sell foreign exchange at a specified price but the payment would be settled only upon maturity at some future date. Wild swings in the peso-dollar exchange on currency spot market led the BSP to direct banks by the middle of 2008 to start submitting NDF reports on a weekly basis to avert surges in NDF trades that could pressure the peso to appreciate more against the US dollar. “We want to better understand not only the amounts of these forwards but also the direction and timing so we can better assess implications on domestic liquidity and exchange rate," Tetangco said. — MRT, GMA News