BSP cuts interest rates to record low

Manila, Philippines – The Bangko Sentral ng Pilipinas (BSP) cut interest rates by 25 basis points to a new low yesterday, taking advantage of benign inflation to protect domestic growth amid worries over the worsening euro zone debt crisis and slowing global economic activity.

The quarter point cut brought the overnight borrowing rate to 3.75 percent.

The move did not come as a surprise as policymakers have flagged the possibility of an interest rate cut as early as last month after inflation sustained its deceleration in June.

“The Monetary Board’s decision is based on its assessment that price pressures have been receding, with risks to the inflation outlook slightly skewed to the downside,” BSP Governor Amando Tetangco Jr. said.

Inflation, which averaged 4.7 percent last year, is expected to slow to 3.1 percent in 2012, the same level seen in June, but the 2013 forecast had been lowered to 3.2 percent from 3.4 percent, BSP Deputy Governor Diwa Guinigundo said.

The BSP has a three- to five-percent inflation target this year.

“The June (2012) inflation number was lower compared to initial assumption. Oil prices have also gone down recently, which has been a very important factor for the revision of the forecast,” Guinigundo explained.

The rise in consumer prices slowed to 2.8 percent in June from 2.9 percent the month before, bringing year-to-date average to three percent or at the lower-end of the BSP’s target.

The peso has also been “firmer” against the dollar, Guinigundo said, giving more purchasing power to consumers and making imports cheaper. The local currency has risen by roughly five percent since the start of the year.

“We expect more capital flows due to sustained deleveraging in banks and sustained monetary easing in the developed nations,” he explained.

Concerns on large capital flows emanate, among others, from its tendency to contribute to the peso’s appreciation, which also has its downside by making Philippine exports cheaper abroad and trimming the value of remittances.

At the same time, Tetangco said global economic prospects remain weak as financial stress continues in the advanced economies.

“On balance therefore, the benign inflation outlook provides room for a reduction in policy rates as a pre-emptive move against the risks associated with the global slowdown,” Tetangco explained.

“Going forward, the BSP will continue to monitor emerging price and output conditions to ensure that monetary policy remains supportive of sustained non-inflationary growth.” –Prinz P. Magtulis (The Philippine Star)