BSP cuts rates by another 50 pts

The Monetary Board of the Bangko Sentral ng Pilipinas decided yesterday to reduce by another 50 basis points its key policy rates due to a stable foreign exchange rate and expectations of slower inflation in the second semester.

The BSP jumped the gun on its US counterpart, the Federal Reserve Board, which is also widely expected to cut US interest rates when its Federal Open Market Committee (FOMC) meets on March 20, 2001.

Effective Monday, the overnight borrowing rate will be down to 10.5 percent from 11 percent, while the overnight lending rate will be 12.75 percent from 13.25 percent. This brings the cumulative reduction in the BSP’s policy rates to 450 basis points since December last year.

In coming up with its decision, BSP Governor Rafael Buenaventura said "the Monetary Board took into account the broad stability in the foreign exchange market, comfortable interest rate differentials, and favorable inflationary expectations in the second half of the year."

In a forum last Wednesday, Buenaventura said he expects the peso-dollar rate to stabilize and trade at an average of P46 to the dollar for the entire year. "The peso will probably be higher at a low end of P44 to the dollar and a high end of P48 or an average of P46," the BSP chief pointed out.His optimism is based on the elimination of the "political risk premium" that foreign investors pegged on the peso, especially at the height of the impeachment trial against deposed former President Joseph Estrada.

The peso swung wildly, dipping to an all time-low of P55.75 to the dollar on Jan. 17, when the public gathered at the EDSA Shrine to demand Estrada’s resignation, only to soar to the P47.50 against the dollar two days later on talks that Estrada had decided to step down.

Another factor which encouraged the BSP to trim its rates is the deceleration of the inflation level to 6.7 percent in February, from 6.9 percent in January.

"The board also considered the balance of risks between output and inflation. With the external weakness posed by the slowing down of the US economy and other major economies, and with inflation contained, some easing of the monetary policy setting is warranted," Buenaventura said.

Buenaventura did not comment on the possibility of further trimming the BSP’s key rates, saying instead that "while the inflation outlook appears benign, the BSP will continue to keep an eye on key developments in the financial markets, and the rest of the economy to guard against emerging threats to the price stability objective of the BSP."

BSP sources said the MB may be inclined to implement more rate cuts but is concerned about government’s capability to keep the budget deficit within its set target.

Finance Secretary Alberto Romulo earlier said the budget deficit for February is likely to exceed the original target because of the poor collection of the Bureau of Internal Revenue.

BSP sources added: "It doesn’t help too that the government collection agencies are not doing well to improve the government’s coffers."

Other sources said, however, the BIR and other government collection agencies usually have lower collections for January and February, but this should pick up starting March to April, which is the season for income tax returns.

Buenaventura added the BSP will also monitor the developments in the US Fed which is expected to cut its key rates on March 20.

With the cut in domestic key rates, the yields on Treasury bills on Monday’s auction Monday, are also expected to decline.