With the rate adjustment, the central bank’s overnight borrowing and lending rates, which influence commercial interest rates, now stand at 4.25 and 6.25 percent, respectively.
BSP Governor Amando Tetangco Jr. said the policy-making Monetary Board of the central bank, in making the decision during its meeting Thursday, found it prudent to trim the key rates as projections of a lackluster performance of the eurozone, which could drag down growth of the global economy, could adversely affect Philippine export earnings.
Tetangco said that given the unfavorable developments offshore, the Philippines should find ways to boost growth and one practical way was to boost domestic demand through a reduction of interest rates. With lower interest rates, monetary officials are hoping demand for banks loans, which already grew at a double-digit pace last year, would rise further to support more consumption and investments.
The BSP chief said there was room for lower interest rates given the favorable inflation outlook. Since inflation is still benign, any price pressure to result from higher demand, which will be induced by lower interest rates, should not cause a breaching of the inflation target. The government aims to keep inflation for this year and next at between 3 and 5 percent.
“The Monetary Board’s decision is based on its assessment that the inflation outlook remains comfortably within the target range. At the same time, the Monetary Board considers the overall balance of global economic activity to be tipping toward a further slowdown,” Tetangco said Thursay in a statement issued after the Monetary Board meeting.
According to BSP Deputy Governor Diwa Guinigundo, inflation for 2012 was estimated to average 3.1 percent. For 2013, the inflation forecast is 3.4 percent.
Last year, the Philippines was estimated to have grown at a slower pace than target, something economists blamed partly to underspending by the national government and to anemic global demand that led to shrinking export earnings.
Gross domestic product grew 3.6 percent in the first three quarters, prompting government economic officials to admit that the full-year growth could have fallen below the low end of the official target of 4.5 to 5.5 percent.
Philippine exports amounted to $44.64 billion in the first 11 months of last year, down 5.6 percent from $47.3 billion in the same period of the previous year.
Government economic managers are hoping to accelerate the growth of the economy to 5-6 percent this year.
Economists said that the Philippines needed to grow at least 7 percent for several years for growth to have an impact on poverty.
But with the debt crisis in the eurozone expected to persist this year, economic officials were forced to seek other sources of growth and let the economy rely less on exports to the Western region.