Fed rate cut creates elbow room for BSP to trim its rates – Tetangco

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the latest cut in US interest rates created an elbow room for the Bangko Sentral ng Pilipinas (BSP)  to ease its policy settings one last time this year.

Although Tetangco cautioned that there were still risks to the BSP’s inflation target, he said the overall outlook remained benign for 2008 when this year’s monetary policy moves start to take effect on the market.

At its meeting on Tuesday, the US Federal Reserve Board decided to cut its key rates by another 25 basis-points in an attempt to prevent a housing and credit meltdown from pushing the economy into a recession.

US Fed officials explained that the cut, the third this year, was necessary to boost US growth because the slump in the housing market and the backlash on the financial system are beginning to affect business and consumption.

BSP officials are also wary of the impact of a slowdown in the US on the country’s economic momentum but Tetangco expressed optimism that at worst, the reverberations would be muted except in the export sector.

At the very least, Tetangco said the cut in the US key rates gave the Monetary Board some elbow room in monetary policy particularly since inflationary pressures were largely absent on the demand-side.

“Nonetheless this should be viewed together with the risks to the favorable outlook such as volatilities in the international commodity and food prices,” Tetangco said.

The central bank chief added that there were also uncertainties in the global financial markets as giant financial conglomerates brace for more and possibly even bigger write-downs of subprime-related losses at the end of the year and on to 2008.

As institutions like Merill Lynch, Citibank and UBS AG became one of the biggest casualties of the meltdown in the US subprime market, investments in emerging markets are expected to dry up with fund managers becoming risk-averse.

According to Tetangco, this factor remained in the list of factors that the MB would be considering when it meets next week for the last monetary policy-setting meeting it would have this year.

The cut in the US Fed rate was widely anticipated and stocks even stumbled in the US stock market because investors are hoping for a larger 50 basis-point cut on the Fed’s most effective tool for influencing economic activity.

The latest cut in the US rates reversed earlier statements that it made saying that the previous two cuts were enough to help the US economy survive the current imbroglio.

Although the BSP itself made no similar statements, it’s elbow room only became even larger after the significant slowdown in domestic liquidity growth since it started its mopping up operations in May.

Moreover, inflation has been consistently well bellow its three to four percent target and was projected to average at 2.7 to 3.1 percent for the whole of 2007 despite surges in dollar inflows and the rise in oil prices.

The absence of demand-side pressure, however, was also seen by the market as an indication that since the current growth was being fueled by consumption, it was largely hollow and therefore unsustainable over the long term.

Consumption funded by remittances from overseas Filipino workers has been fueling the country’s economic momentum for the last decade and even more so in the last two years when remittances started hitting all-time highs.

In contrast, industry and agriculture have been lagging behind services, indicating little opportunity for significant job creation and eventual decline in what economists said was the economy’s dangerous dependence on remittances.