BSP cuts key rate to record low of 4%

MANILA, Philippines - In a continued effort to jumpstart economic activities, the Bangko Sentral ng Pilipinas (BSP) cut its policy rates by 25 points yesterday, bringing down its overnight borrowing rate to a record low of four percent and its lending rate to six percent.

 With this latest move, the BSP has effectively reduced its benchmark rates by a total of 200 basis points since it began its rate easing cycle in December 2008 to soften the blow of the global recession on the economy.

BSP officer in charge Armando Suratos said the reductions were effective immediately and the interest rates on term reverse repurchase rates, repurchase rates and special deposit accounts were to be reduced accordingly.

“This is the sixth time since December 2008 that the BSP has cut its policy interest rates,” Suratos said.

Previously, the lowest overnight lending rate was 4.125 percent recorded on May 15, 1992.

The BSP said its latest inflation forecast indicated that the average rate was expected to drop to 3.3 percent for the whole of 2009, lower than the previous forecast of 3.4 percent.

The BSP uses an inflation targeting model in setting monetary policy.

Suratos said the MB decided to reduce central bank rates based on the latest baseline forecasts showing average inflation keeping within the target ranges for 2009 and 2010.

“Given prevailing downside pressures on prices and output due to the impact of weaker global economic activity on domestic demand, the reduction in policy rates would support economic activity as banks are expected to pass on the lower borrowing costs to clients,” Suratos said.

But monetary officials said the country is not out of the woods yet and the BSP refused to say that its policy easing cycle is finally over even as most central banks in major economies have begun talking about exit strategies.

Since emerging markets lag behind developed markets in terms of stabilizing and eventually recovering, BSP Deputy Governor Diwa Guinigundo said the monetary board still wanted to see more definitive developments both in the domestic and the global economies.

“If you look at the recent news coming out, there are negative indicators such as labor markets turning out to be softer than originally thought,” Guinigundo said. “But then there are also signs that economies have started to show they are on the mend,” he added.

Guinigundo said the domestic economy, on the other hand, is still largely expected to be slow through 2010 which explained the steadily benign inflation outlook.