BSP brings rates to new lows with 25-bp cut

Prevent further decline in inflation, temper peso’s rise

THE BANGKO Sentral ng Pilipinas yesterday slashed its key policy rates, bringing them to new lows, in a bid to prevent inflation from falling below target levels.

Although authorities left it unsaid, the rate cut was also aimed at tempering the appreciation of the peso, which was being fueled by foreign funds’ appetite for peso-denominated securities.

The central bank’s overnight borrowing and lending rates, which influence commercial lending rates, were cut by 25 basis points to 3.75 and 5.75 percent, respectively.

Lower interest rates are expected to spur demand for loans which, in turn, could help boost purchases of goods and services. Higher demand, if supply remains constant, will help accelerate inflation.

The BSP said preventing the consumer price index from falling below target was as important for the economy as avoiding a higherthan-target inflation. Depending on variables, a very low inflation rate can be just as bad for business as high inflation, according to economists.

The inflation targets for this year and next year were set at a range of 3 to 5 percent. Monetary officials said this inflation range would keep

prices of consumer goods relatively affordable, while helping support a healthy pace of economic growth.

“The Monetary Board’s decision is based on its assessment that price pres- sures have been receding, with risks to the inflation outlook slightly skewed to the downside,” BSP Governor Amando Tetangco Jr. said in a press conference held immediately after the policy ratesetting meeting of the central bank’s Monetary Board.

The move to cut rates came following the release of a report showing that inflation averaged only 3 percent in the first semester. The move was also anchored on the assessment that the average inflation for the whole year could average below 3 percent if the BSP would not make any policy intervention.

In the meantime, taking into account the impact of the 25basis-point rate cut, the BSP estimates inflation to average 3.1 percent this year and 3.2 next year.

The slight price movements in the country is attributed partly to a weak global demand that tempers the cost of imported goods, such as oil. Global demand is being weighed down by the debt crisis in the euro zone and the sluggish performance of the United States’ economy.

“The Monetary Board believes that the prospects for global economic activity are likely to remain poor. In the advanced economies, financial market stress continues to build up, and there remains concerns about the prospects for urgent fiscal adjustments and reforms,” Tetangco said.

BSP Deputy Governor Diwa Guinigundo said the rate cut was a pre-emptive move against the drag on domestic economic growth that might be brought about by the deterioration in the economic conditions in the euro zone and the uncertainties in the US. July 26, 2012 Country United States Japan United Kingdom Hong Kong Switzerland Canada Singapore Australia Bahrain Saudi Arabia Brunei Indonesia Thailand UAE EU Korea China Denmark India Malaysia New Zealand Sweden Taiwan