BSP reduces key rates anew by .5%

The Bangko Sentral ng Pilipinas (BSP) announced yesterday it will shave another half percentage point from its overnight rates effective Monday in view of stable market conditions.

Effective Monday, the key borrowing rate will be 13.50 percent and the lending rate 15.75 percent. So far this month, the BSP has cut one and a half percentage points off its overnight rates in three half-point reductions, after boosting these by four percentage points in mid-October to defend the peso against the dollar.

The peso was being hammered then by a political crisis caused by corruption allegations against President Estrada.Asked why the BSP cut its rates, Governor Rafael Buenaventura replied: "The market is stable."

Even though the peso has lately breached 50-to-a-dollar, the local currency market has been calm since the President’s impeachment trial began Dec. 7.

Currency watchers believe the BSP may hold off on further interest ratecuts for the rest of the year as a key seasonal support for the peso - dollar remittances from overseas Filipino workers - will dry up around Christmas.

The BSP is eager to bring overnight rates down as quickly as possible because it fears a sustained period of high interest rates will jeopardize economic growth. For 2001, the BSP expects its overnight borrowing rate – its main tool to control domestic liquidity – will average 11 percent.

National Treasurer Leonor Briones said the rate for the bellwether 91-day Treasury bill (T-bill) may soften further next week due to the additional 50 basis points reduction in the BSP’s key overnight rates.

A reduction in T-bill rates would also result in a similar drop in bank lending rates which has been the main objective of the government.

Government is trying to bring down lending rates to stimulate loan demand that would in turn result in more productive economic activity.
However, the BSP’s drive to bring down interest rates may be derailed by the ballooning budget shortfall.

Buenaventura and the International Monetary Fund (IMF) had already warned that if the budget deficit is not reversed, there would be increasing pressure on the BSP to jack up its key rates again.