The Bangko Sentral on Thursday cut the borrowing and lending rates by 25 basis points for the second time this year in a bid to boost the domestic economy amid prospects of an anemic global growth.
The 25-basis-point reduction brought back the Monetary Board’s policy interest rates to record-low levels of 4 percent for overnight borrowing and 6 percent for overnight lending, Bangko Sentral Governor Amando Tetangco Jr. said. The Monetary Board is the policy rate-setting body of Bangko Sentral.
The policy rates of the Bangko Sentral dictate the interest rates charged by banks on loans, with lower rates helping boost lending and economic activities, although this could result in a higher inflation rate. The latest rate cut followed the 25-basis point reduction in policy rates in January.
“The Monetary Board’s decision was based on its assessment that the inflation outlook remains within the target range, with well-anchored inflation expectations. Latest baseline forecasts have continued to indicate that inflation is likely to settle within the lower half of the 3 to 5 percent target range in 2012 and 2013,” said Tetangco.
He said risks to inflation outlook also appeared to be broadly balanced, with the subdued pace of global economic activity expected to temper the rise in commodity prices.
Tetangco, however, conceded upside risks to inflation stemmed mainly from volatility of oil prices due to geopolitical tensions in the Middle East and from the impact of strong capital inflows on domestic liquidity growth.
Dubai crude hit $120 per barrel due to the geopolitical tension in the Persian Gulf last week. Bangko Sentral Deputy Governor Diwa Guinigundo said while oil prices have gone up in recent weeks, the year-to-date average of Dubai crude price remained within the government’s budget assumptions of $90 to $110 per barrel.
“Oil price increases are not alarming per se. But what is alarming is if we see a consistent climb and prolonged increase in oil prices because this could cement inflation beyond forecasts and in our case, this could lead to a dis-anchoring of inflation expectations from the current 3 to 5 percent,” said Guinigundo.
Guinigundo said he was hoping the current rise in international oil prices would not reach the 2008 peak of over $140 a barrel. “If there is no clear resolution in the Persian Gulf, there is a possibility that prices would shoot beyond $140 per barrel but we are hopeful that this would be resolved very quickly and if that happens, there would be a let-up in prices,” said Guinigundo.
Inflation rate, using the 2006-price series, averaged 4.8 percent in 2011. It eased to 3.9 percent in January and is seen softening further to a range of 2.7 and 3.6 percent in February amid lower increases in utility prices and a stronger peso. The official inflation data would be released March 6.
The economy, as measured by the gross domestic product, expanded at a slower pace of 3.9 percent in 2011 and exports are seen to remain relatively weak given the sluggish demand from traditional global markets.
The interest rates on term reverse repurchase, repurchase facilities and special deposit accounts were also reduced Thursday.
The Monetary Board noted that domestic demand has continued to grow at a modest pace, reflecting mainly the impact of weaker external demand.
“Global economic conditions are expected to stay subdued as fiscal and banking sector headwinds in advanced economies affect global output growth and as market confidence remain fragile,” said Tetangco. –Elaine Ramos Alanguilan, Manila Standard Today
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