BSP may consider cutting key rates, says FMIC

The Bangko Sentral ng Pilipinas (BSP) may consider reducing interest rates before the year ends, in a bid to support local economic growth amid unfavorable developments in the United States and Europe.

This was according to First Metro Investments Corp. (FMIC), which said in a research paper that the Philippines may follow the lead of neighboring countries and ease monetary policy, following fears that the weak performance of industrialized nations may lead to a global recession.

FMIC said the more likely scenario is for the BSP to keep rates steady in the policy-setting meeting of its Monetary Board next month, but added that making monetary policy more accommodative, such as through a cut in interest rates or reserve requirement, is another option being considered.

The investment bank said tightening, such as through a hike in interest rates or increase in the reserve requirement, is out of the picture for the remainder of the year.

“With inflation pressures at bay, loosening of key policy rates is now the primary option for most economies, with Indonesia leading the way and the likes of the Philippines, Thailand and Malaysia mulling over their monetary moves,” FMIC said in the latest issue of the “Market Call,” its joint publication with the University of Asia and the Pacific.

The BSP’s key policy rates currently stand at 4.5 and 6.5 percent for overnight borrowing and lending, respectively.

The rates were raised in the first half from only 4 and 6 percent in a bid to fight rising inflationary pressures.

Monetary officials said current policy rates are still relatively low despite the total 50-basis-point hike in the first semester and should continue to encourage people to borrow from banks to finance investment initiatives.

FMIC said, however, that the prolonged crisis in the eurozone and the anemic performance of the US economy have dragged growth prospects even for emerging markets like the Philippines.

In the first semester, the Philippines grew by only 4 percent from 2010.

This was considered a decent performance compared with the growth rates of industrialized countries but was a sharp slowdown from the over 8 percent registered in the same period last year.

The slowdown was blamed partly on the economic problems of the US and the eurozone that have caused a drop in demand for Philippine exports.

FMIC said keeping monetary policy accommodative is prudent at the moment to counter the dampening effects of a sluggish global economy on the Philippines’ own growth performance.

The government is targeting a domestic economic growth this year of between 4.5 and 5.5 percent.