Bangko Sentral cuts key rates by 25 basis points

MANILA, Philippines – As inflationary pressures drop this year, the Bangko Sentral ng Pilipinas (BSP) decided yesterday to cut its policy rates by another 25 basis points, bringing the cumulative reduction to 150 basis points since December 2008.

The move followed the reduction in the central bank’s inflation outlook from 3.5 percent this year to an average inflation rate of only 3.42 percent and for 2010, a new projection of 4.1 percent.

The Monetary Board decided yesterday to reduce its key policy interest rates to 4.5 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.5 percent for the overnight lending or repurchase (RP) facility, effective immediately.

But monetary officials declined to say whether yesterday’s rate cut was the last and final cut in its current easing cycle, saying that the global and domestic economic conditions were too fluid to easily predict.

The latest cut brought the current RRP rate to its lowest since May 15, 1992 when it was recorded at 4.125 percent.

BSP Governor Amando M. Tetangco Jr. said the latest cut in interest rates also meant a corresponding adjustment in the interest rates on term RRPs, RPs, and special deposit accounts (SDAs).

According to Tetangco, the BSP considered the latest baseline forecasts which indicated a lower inflation path over the policy horizon, with average inflation expected to settle within the target ranges in 2009 and 2010.

“In addition, the Monetary Board considered that, on balance, the risks to inflation are skewed to the downside given expectations of weaker global and domestic demand conditions and a low probability of a significant near-term recovery in commodity prices,” Tetangco said.

But Tetangco said the inflation rate could still go up, especially considering the volatility in exchange rates and the prices of oil and some food products, as well as increases in utility rates.

“The decision to lower policy rates will help bring down the cost of borrowing and promote wider access to domestic financing,” Tetangco explained. “The Monetary Board also noted that, while there are initial signs of improvement, the restoration of the global financial system to normalcy may take some time.”

The Development Budget Coordinating Committee (DBCC) has lowered the government’s economic growth target  for 2009 and 2010 but the central bank said the latest rate cut was promoted more by declining inflation.

According to BSP Deputy Governor Diwa Guinigundo, it was the outlook on inflation that gave the MB the flexibility to be accommodating, adding that the economy could still tolerate more liquidity in the system.–Des Ferriols, Philippine Star