BSP cuts interest rates to 4% for overnight borrowing, 6% for lending

MANILA, Philippines—The Bangko Sentral ng Pilipinas has cut its key policy rates by another 25 basis points, citing the need to counter potential ill-effects of lingering global economic problems on the Philippines.

With the decision, which followed a similar quarter-of-a-percentage-point cut done in the last policy setting-meeting of the BSP’s monetary board in January, the central bank’s key policy rates now stand at 4 and 6 percent for overnight borrowing and lending, respectively.

“Global economic conditions are expected to stay subdued as fiscal and banking sector headwinds in advanced economies affect global output growth and as market confidence remains fragile,” BSP Governor Amando Tetangco Jr. said in a statement Thursday.

The unfavorable global factors Tetangco was referring to included the prolonged debt crisis in the eurozone that would likely to continue dragging export earnings of the Philippines and other countries that have been exporting goods to the Western region.  The crisis is also seen dampening outlook on the global economy, thereby dragging appetite for investments even in countries outside the eurozone.

In 2010, the Philippines grew by a mere 3.7 percent, thus falling short of the official target of 4.5 to 5.5 percent. The shortfall was blamed partly on anemic demand for Philippine exports largely due to crisis in the eurozone and sluggish performance of the US economy. For this year, the government is hoping growth will accelerate to a range of 5 to 6 percent.

Cut in interest rates is seen boosting demand for loans, which in turn support increase in consumption and investments. However, since lower rates spur demand, it has the tendency to accelerate inflation.

The BSP stressed, nonetheless, that it would be open to another rate cut because latest estimates showed that inflation for the year could still settle well within the official target of between 3 to 5 percent even if interest rates were low. Any inflationary impact of a 25-basis-point reduction in interest rates would not be enough to cause inflation to go beyond the 5-percent targeted ceiling, it said.

BSP Deputy Governor Diwa Guinigundo said inflation has been estimated to average at 3.1 percent for 2012 percent for 2013. The projections are closer to the low end, rather than the high end, of the target inflation range, he said.

Guinigundo acknowledged the inflationary threats posed by the ongoing tension between Iran and Europe that has been causing global oil prices to rise.

However, Guinigundo said the threats have so far not been significant enough to cause inflation to go beyond the target.

Dubai crude recently hit about $120 a barrel. The government assumed that Dubai crude would average between $90 and $110 a barrel this year when it set its inflation target.

“Oil price has already reached $120 recently, but the running average is still within the official assumption,” Guinigundo said.

He said that the BSP, nonetheless, has been closely monitoring developments offshore to determine further policy adjustments that might be necessary in the weeks or months ahead to ensure that inflation would not breach the target.