BSP brings rates to new lows with 25-bp cut

MANILA, Philippines—The Bangko Sentral ng Pilipinas on Thursday slashed its key policy rates for the third time this year, bringing them to new lows, in a bid to prevent inflation from falling below target levels.

Although authorities left it unsaid, the rate cut was also aimed at tempering the appreciation of the peso, which was being fueled by foreign funds’ appetite for peso-denominated securities.

The central bank’s overnight borrowing and lending rates, which influence commercial lending rates, were cut by 25 basis points to 3.75 and 5.75 percent, respectively.

Lower interest rates provide easier access to capital for business, which observers say is crucial for job creation in an economy where a fourth of the labor force is out of work or underemployed.

The latest central bank action followed two equivalent cuts to the two key rates on January 19 and March 1.

Lower interest rates are expected to spur demand for loans which, in turn, could help boost purchases of goods and services. Higher demand, if supply remains constant, will help accelerate inflation.

The BSP said preventing the consumer price index from falling below target was as important for the economy as avoiding a higher-than-target inflation. Depending on variables, a very low inflation rate can be just as bad for business as high inflation, according to economists.

The inflation targets for this year and next year were set at a range of 3 to 5 percent. Monetary officials said this inflation range would keep         prices of consumer goods relatively affordable, while helping support a healthy pace of economic growth.

“The Monetary Board’s decision is based on its assessment that price pressures have been receding, with risks to the inflation outlook slightly skewed to the downside,” BSP Governor Amando Tetangco Jr. said in a press conference held immediately after the policy rate-setting meeting of the central bank’s Monetary Board.

While inflation is likely to settle near the lower end of the government’s 3-5 percent target range for this year and next, the policy-setting monetary board believes global economic prospects are likely to remain weak, it said.

“While the Philippine economy can rely on the resilience of domestic spending to sustain growth, additional policy support would serve as a buffer against strong global headwinds,” it said in a statement.

“On balance therefore the benign inflation outlook provides room for a reduction in policy rates as a pre-emptive move against the risks associated with the global slowdown.”

The move to cut rates came following the release of a report showing that inflation averaged only 3 percent in the first semester. The move was also anchored on the assessment that the average inflation for the whole year could average below 3 percent if the BSP would not make any policy intervention.

In the meantime, taking into account the impact of the 25-basis-point rate cut, the BSP estimates inflation to average 3.1 percent this year and 3.2 next year.

The slight price movements in the country are attributed partly to a weak global demand that tempers the cost of imported goods, such as oil. Global demand is being weighed down by the debt crisis in the eurozone and the sluggish performance of the United States’ economy.

“The Monetary Board believes that the prospects for global economic activity are likely to remain poor. In the advanced economies, financial market stress continues to build up, and there remain concerns about the prospects for urgent fiscal adjustments and reforms,” Tetangco said.

BSP Deputy Governor Diwa Guinigundo said the rate cut was a pre-emptive move against the drag on domestic economic growth that might be brought about by the deterioration in the economic conditions in the eurozone and the uncertainties in the US.

The economy grew 3.7 percent last year, but the expansion picked up to 6.4 percent in the three months to March.

Last week the World Bank raised its 2012 growth forecast for the Philippines to 4.6 percent from 4.2 percent, following the stronger-than-expected start to the year.

However, it warned the crisis in Europe and a Chinese slowdown could affect key export markets and cause job losses in electronics and other manufacturing industries.—With Agence France-Presse

Originally posted at 06:28 pm | Thursday, July 26, 2012