amando m tetangco, jr : the bsp and the banking community – a partnership for a better year in 2007 speech by mr amando m tetangco, jr, governor of the central bank of the philippines ( bangko sentral ng pilipinas ), at the annual reception for the banking community, at the central bank of the philippines, manila, 16 january 2007. * * * distinguished members of the banking community, special guests, friends, ladies and gentlemen. on behalf of the monetary board, i welcome all of you to our annual reception for the banking community. we at the bangko sentral ng pilipinas always look forward to this yearly event because it gives us, central bankers, the opportunity to interact with you at the social level and - more importantly because we have you as a captive audience as we deliver the banking sectors ’ report card for the past year, as well as our roadmap to the future. to put these in perspective, i will review our economic performance in 2006, share our views on how the economy will perform in 2007, and what these imply for the monetary and banking policies of the bangko sentral ng pilipinas. ladies and gentlemen. in plain language, 2006 was a good year for the economy. we saw gdp continue a pattern of broad - based expansion, with the services sector, to which banks belong, recording the strongest performance. fiscal reforms and government ’ s prudent management of its resources continue to yield strong dividends, with revenue growth outpacing spending. at the same time, monetary and banking policies generated positive results : slower inflation, declining interest rates, a stronger peso, and gross international reserves at an all - time high on the back of strong inflows from export receipts, ofw remittances, and foreign investments. it is noteworthy that even with supply shocks from record - high domestic oil prices and the value - added tax reforms, we managed to grow the economy without fueling inflation. it is equally noteworthy that in 2006, the consolidated assets of the philippine banking sector reached a record high level, even as asset quality continued to improve with the implementation of the spv law. in fact, as of november 2006 and for the first time since the 1997 asian crisis, the benchmark non - performing loan ratio of commercial banks dropped to less than seven per cent ; similar trends are being observed in thrift and rural banks. let us therefore give the banking sector a well

there is no international consensus on the appropriate width of the corridor, a narrow corridor provides clearer guidance for the market and also helps to limit volatility in short - term interest rates. by introducing auction - type instruments, the irc system is intended to ensure more equitable access for all participants. in addition, we hope to ultimately aid in the development and deepening of the country ’ s capital and money markets. over time, as more liquidity is absorbed by the bsp, market participants will be encouraged to be more active and more prudent in managing their own day - to - day and short - term liquidity positions. it is our hope that, in the process, we will encourage counterparties to reduce their reliance on central bank facilities and instead transact more with each other through interbank markets, in order to meet liquidity requirements. the more immediate benefit of the new auction - type instruments under the irc is that the price discovery process will be facilitated by the bids we receive from market participants, which will by june 3, all rrps under the current facility would have matured and all term placements under sda would have been wound down to give way to the new facilities under the irc. bis central bankers ’ speeches provide information for the bsp and for the market on the prevailing cost of and demand for liquidity. in turn, better price discovery will allow the industry to establish more accurate interest rate benchmarks in the future. ladies and gentlemen, let me emphasize that the new irc system is not a departure from the bsp ’ s current monetary policy framework. in fact, the irc system is envisioned to further support the inflation targeting framework by reinforcing the bsp ’ s policy stance as represented by the overnight reverse repurchase rate that will remain our key policy rate. more importantly, the shift to the irc system does not represent a change in the bsp ’ s stance of monetary policy. the irc reforms are primarily operational in nature and will not materially affect prevailing monetary policy settings upon implementation. at the same time, short - term liquidity conditions are expected to remain broadly unchanged, as funds will continue to be absorbed through monetary operations under the new irc system. moreover, the rate adjustments in the bsp ’ s instruments under the irc system remain consistent with the outlook for inflation and growth. our current domestic environment of manageable inflation, a stable financial sector and firm economic growth prospects affords us