Bangko Sentral seen to cut key rate by 50 basis points

MANILA, Philippines – The Development Bank of Singapore (DBS) expects the Bangko Sentral ng Pilipinas (BSP) to cut its overnight borrowing rate by another 50 basis points (bps) today due to easing inflation in the country.

In a report on the Philippines released yesterday, DBS said the country’s inflation rate likely slowed down to 6.8 percent in February from 7.1 percent in January because of lower prices of oil and other commodities.

The National Statistics Office (NSO) has reported that the inflation rate slowed to 7.1 percent in January 2009 from eight percent in December last year.

Inflation in November was recorded at 9.9 percent. For the whole of 2008, inflation rate was at 9.3 percent.

The NSO is scheduled to release today the inflation figure for February.

“The CPI report will be a confirmation that inflation remains the least of the central bank’s concerns at the moment. With gross domestic product (GDP) growth set to slow sharply this year – we look for real growth of 2.5 percent from 4.6 percent in 2008 – the central bank no doubt remains more pre-occupied with providing support to the economy,” DBS said.

As such, it expects monetary authorities to cut rate for the third time in four months to 4.50 percent from five percent for the overnight borrowing rate and to 6.50 percent for the overnight lending rate from seven percent.

DBS said that by June, monetary authorities are likely to cut benchmark rates to four percent for the overnight borrowing rate and to six percent for the overnight lending rate.

A cut in the central bank rates helps stimulate the economy by encouraging banks to lend to individuals and businesses.

In terms of yields of government papers, DBS expects upward pressure in the coming months.

DBS attributes this to the government’s plan to increase its borrowing requirements this year by P50 billion to finance a swelling budget deficit.

National Treasurer Roberto Tan had said that the government would have to increase its borrowing requirements this year by P50 billion to plug a wider-than-expected deficit of P177.2 billion, above a previous program of P102 billion.

“With the government having set a 2009 local borrowing target of P386.5 billion in November and now talking about an additional P50 billion, 10-year yields should remain under upward pressure in the coming months even if there is good demand for short-dated debt out of the banking system,” it said.

On Tuesday, the Bureau of the Treasury (BTr) rejected bids for its 10-year zero coupon bonds as banks submitted unreasonable offers. Total tenders reached P7.685 billion out of a total offering of P10 billion.

Had the government’s auction committee accepted the bids, the yields would have ranged from 8.250 to 9.5 percent, significantly above the rate of a comparative debt paper of 7.875 percent. –Iris C. Gonzales (The Philippine Star)