BSP cuts interest rates by 25 bps

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) cut interest rates yesterday – a move expected by analysts to boost economic growth and at the same time cushion the economy from the expected global slowdown this year.

Key interest rates were lowered by 25 basis points, bringing the overnight borrowing rate to 4.25 percent and the overnight lending rate to 6.25 percent, the bank announced after a meeting of its monetary board.

BSP Governor Amando M. Tetangco Jr. warned in a statement that global economic activity was heading towards a slowdown and the country would face “external headwinds in 2012”.

Tetangco said the US economy remained vulnerable while the eurozone was “notably weaker,” hurting global confidence.

“Given these considerations, the monetary board has concluded that the benign inflation outlook allowed some scope for reduction in policy rates to help boost economic activity and support market confidence,” he said.

He said the board assessed that domestic inflation this year would fall within the lower half of the government’s target range of between three and five percent.

The government announced earlier this month that inflation in December dropped to 4.2 percent, from 4.8 percent in November.

This brought inflation for last year to 4.8 percent.

The Philippine central bank had kept interest rates steady for the second half of last year, as it kept a close eye on inflation, after consecutive hikes in March and May.

Tetangco explained that the central bank’s decision to lower interest rates was based on the assessment that the inflation outlook remains comfortably within the target range of three percent to five percent.

“Pressures on global commodity prices are seen to continue to abate amid weaker global growth prospects,” the BSP chief said.

However, he pointed out that the impact of strong capital inflows on domestic liquidity and the effect of geopolitical tensions in the Middle East and North African (MENA) states on global oil supplies would continue to pose upside risks to inflation.

“It is very difficult to rule out those price pressures both on the demand and supply side. We are confident that the inflation outlook for 2012 and 2013 is favorable and that inflation expectations remain well anchored,” BSP Deputy Governor Diwa Guinigundo said.

Guinigundo said the BSP now sees inflation averaging 3.1 percent instead of 3.51 percent this year and 3.4 percent instead of 3.12 percent next year.