Bangko Sentral to cut policy rates by another 25 basis points

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) will cut its policy rates by another 25 points today but the market is also expecting an end to the easing cycle despite the rapid decline in inflation rate.

Analysts said they expect inflation rate to bottom out at around one percent this quarter and although this would give more room for continuing monetary easing, they said the central bank is not likely to use it further.

ING said yesterday that there was a solid consensus of another 25 basis-point cut in the policy rate of the BSP, bringing it down to four percent.

“We forecast the policy rate bottoming at 3.75 percent in the current quarter.” said ING analyst Tim Condon.

ATR Kim Eng, on the other hand said a fourth successive 25-point cut was “practically pencilled in” as inflation declined abruptly and central bank officials signalled clearly that they would relax monetary policy further.

But ATR Kim Eng said this might also be the end to the policy rate cuts that would round up to 200 basis points since December should the Monetary Board decide in its favor today.

ATR Kim Eng said crude oil and commodity prices peaked in July 2008 and in August at 12.4 percent, further deceleration was likely in the coming months.

“The question is whether there are further rate cuts as a result,” ATR Kim Eng said. “Most central banks tend to focus on core rather than headline inflation because it excludes volatile raw food and energy prices.”

ATR said that when the slowdown in prices has stopped, price increases would pick up momentum again but only gradually. “Consequently we don’t think there will be a quick change in the policy rate after the easing cycle ends,” they said.

But the BSP admitted that the reduction in policy rates was not translating as efficiently as it should into a corresponding reduction in bank lending rates.

The central bank said there is still room for banks to reduce their lending rates to encourage borrowing but the lacklustre economy would likely compel companies to use funds for capital build up rather than expansion. “In my opinion, banks can further reduce lending rates,” said deputy central bank governor Diwa Guinigundo. “Banks should be more supportive of efforts to boost economy by lending more.’’

Lending rates have gone down but bank regulators said the reduction in the central bank rates would not bring bank rates down to as low as borrowers would expect.

The central bank said this meant that monetary officials would have to remain aggressive in their monetary policy adjustments to achieve the goal of allowing liquidity to flow from financial institutions into the credit market.

But the BSP said consumers would not see bank lending rates coming down close the levels at which central bank lends to banks and banks lend to each other.

“As of May, we see that lending rates have gone down about a third,” said BSP Governor Amando M. Tetangco Jr. “But in times like this, we can not expect a 100 percent pass-through of policy rate reductions.”

Tetangco said the pass-through rate was around 40 percent which meant that nearly half of the cut in the policy rate of the central bank have actually been passed on to borrowers.