BSP cuts rates to boost growth

Posted at 01/19/2012 4:21 PM | Updated as of 01/19/2012 7:47 PM

MANILA, Philippines (2nd UPDATE) - The Bangko Sentral ng Pilipinas (BSP) cut its policy rates for the first time since 2009 on Thursday in a bid to stir up economic growth and on the back of a manageable inflation outlook.

In line with analysts' expectations, the BSP slashed its overnight borrowing rate by 25 basis points to 4.25%, and the overnight lending rate to 6.25% in its first policy rate-setting meeting this year.

"The Monetary Board's decision is based on its assessment that the inflation outlook remains comfortably within the target range, with expectations well-anchored. At the same time, the Monetary Board considers the overall balance of global economic activity to be tipping towards a further slowdown," the central bank said.

"Given these considerations, the Monetary Board has concluded that the benign inflation outlook allowed some scope for a reduction in policy rates to help boost economic activity and support market confidence," it added.

Eleven of 13 economists in a Reuters poll had forecast the BSP would cut policy rates by 25 basis points, and some expected the bank to follow up with another quarter-point cut before the end of June.

"With the government stepping up spending aggressively in November/December to cushion the economy from increasing external headwind, the central bank probably felt that monetary policy should also complement the expansionary fiscal policy. The recent macro data on inflation declined further to 4.2% in December and exports growth probably strengthened the case for a rate cut," said Song Seng Wun, economist at CIMB, Singapore.

The BSP raised interest rates in March and May last year. It then increased bank reserve requirements in June and July, bringing them back to the pre-2008 global financial crisis level of 21%.

Thursday's policy meeting came more than a week before the government releases gross domestic product (GDP) data, which some economists expect to show 2011 full-year growth at less than 4%, lower than a government target of 4.5% to 5.5%, and way below the 7.6%expansion in 2010.

The Philippine economy lost significant momentum last year as the government spent less than targeted, and exports sharply declined following supply chain disruptions and weak demand for the country's electronic and semiconductor products.

Annual inflation cooled to an 11-month low in December, reinforcing the central bank's view of a manageable inflation outlook and allowing a shift in policy focus towards boosting growth.

To help spur economic activity, the government vowed to frontload spending of its P1.8-trillion budget for 2012 to build roads, school buildings and other major infrastructure projects early in the year to help fuel economic growth seen at between 5% to 6% this year.

Last week, Indonesia and South Korea both held their key policy interest rates steady as worries about inflationary pressures trumped concerns over sluggish global growth.

The central bank, which uses an inflation targeting model to set policy, wants to keep average inflation this year and next year at 3% to 5%, based on the old 2000 data series. It will start using a new data series based on 2006 prices this month.

The policy-making Monetary Board holds a rate-setting meeting every six weeks. - With Reuters