BSP likely to cut policy rates in 1st quarter of 2012

MANILA, Philippines—The Bangko Sentral ng Pilipinas has signaled it may cut policy rates in the first quarter of 2012 in the wake of expectations that a prolonged crisis in the eurozone would dampen growth prospects for emerging economies like the Philippines.

BSP Governor Amando Tetangco Jr. said that since increase in consumer prices would likely remain benign in 2012, the central bank would have the flexibility to respond to the impact of the crisis in the West on the Philippines through a cut in its policy rates.

Lower interest rates encourage individuals and enterprises to secure loans, which in turn could help boost consumption and investments.

Tetangco said a pickup in demand for goods and services, as a result of lower interest rates, would not likely cause inflation to go beyond targeted levels because it has so far been very manageable.

“In the meantime, as the favorable inflation outlook provides us flexibility, we [BSP] are open to possible easing early next year, especially if our own growth prospects continue to be subdued,” Tetangco told reporters.

The central bank’s policy rates, which influence commercial interest rates, currently stand at 4.5 percent for overnight borrowing and 6.5 percent for overnight lending.

The statistics department reported that the annual inflation rate stood at 4.7 percent in November, within the government’s target ceiling of 5 percent. The BSP expects inflation to remain below the said ceiling in the next two years.

A prolonged debt crisis in the eurozone, one of the biggest export markets, is expected to drag growth of exporting countries like the Philippines. Should the crisis in the Western region worsen, cost of borrowing in the international market could also rise, therefore increasing expenditures and dampening profits of enterprises.

Monetary officials said reducing interest rates would be one way to address a potentially adverse impact of the eurozone woes on the Philippines.

However, they also said the national government should do its part, particularly by accelerating public spending.

Decline in public spending so far this year has been blamed for the less-than-expected growth for the Philippines in the first three quarters.

The Philippines grew by a mere 3.6 percent in the first three quarters, prompting the government to admit that the official target of 4.5 to 5.5 percent for the full year may no longer be attained.

Government expenditures in January to October this year amounted to P1.195 trillion, down by 5.4 percent from P1.26 trillion in the same period in 2010. The drop in spending was contrary to original plans of the government to pump-prime the economy through higher spending, especially for social services and infrastructure.

Budget officials said the decline in public spending was due to efforts of the Department of Budget and Management to scrutinize spending proposals of line agencies amid the Aquino administration’s anti-corruption drive. They claimed, however, that public spending had already picked since the start of the fourth quarter.