Bangko Sentral cuts key policy rates

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) decided yesterday to cut its key rates by another 25 basis points, the third reduction in policy rates since December.

Yesterday’s rate reduction brought the central bank’s borrowing rate to 4.75 percent, its lowest level since May 1992 when the rate was recorded at 4.125 percent and its overnight lending rate to 6.75 percent.

With the reduction in the key rates, the interest rates on term RRPs, RPs, and special deposit accounts (SDAs) were also reduced accordingly and effective immediately.

The market is widely expecting the BSP to cut its rates by 25 to 50 basis points yesterday but monetary officials said the decision to cut by 25 instead of 50 did not mean that the easing cycle has ended.

BSP Governor Amando M. Tetangco Jr. said the rate reduction was the third consecutive reduction in policy rates since December 2008, bringing the cumulative reduction in the BSP’s key policy rates to 125 basis points.

“In its assessment of macroeconomic conditions, the Monetary Board noted that the latest baseline inflation forecasts continue to indicate within-target inflation in 2009 and 2010,” Tetangco said, adding that this was based on the latest data on, among others, oil prices, demand indicators, and inflation readings.

According to Tetangco, the MB decided that global financial strains are likely to persist and pose risks to economic activity.

“An accommodative monetary policy stance is expected to help ensure greater availability of credit and reinforce market confidence,” he said.

But Tetangco said there is a growing likelihood that the inflationary risks being watched by the BSP would have the upside impact that monetary officials expected early on.

Tetangco said the prices of domestic commodities could continue to increase because of the volatility in oil prices and in exchange rates, increases in utility rates, and potential price pressures coming from some agricultural commodities, the Monetary Board decided that a more measured adjustment of policy rates is needed.

BSP Deputy Governor Diwa Guinigundo said the central bank had other non-rate instruments that it could use for more calibrated easing should it become necessary in order to sustain growth.

“We have already adjusted the reserve requirement and a further adjustment may be done,” Guinigundo said. “The rediscounting budget has also been increased and if utilization approaches a certain level, then this is another area we could look at.”

“We’re still easing, we have not paused,” Guinidungo said. “We just have to be conscious of inflation pressures. We also want to convey that notwithstanding some of these pressures, our forecast continue to indicate that we will be within target.”

According to Guinigundo, the risks outlined by the MB were already factored in to the 2009 and 2010 inflation forecast but he said the difference now was that these risks were more likely to exert pressure.– Des Ferriols, Philippine Star