As the mortgage crisis continues to wreck the economies of world superpowers, the Philippines, just like the rest of developing countries in Asia, is focusing on protecting the economy from imminent weaker growth.

As expected, the Bangko Sentral ng Pilipinas (BSP) on Monday kept its overnight rates steady at 6 percent and its lending rate at 8 percent, halting a series of hikes since June that have raised rates by 1 percentage point.

Overnight rates are one of the tools the central bank uses to temper potential shocks in th economy.

The BSP started raising interest rates when as inflation rates reached double digits, hitting 12.5 percent in August, a 17-year high. The BSP recognized, however, that it could hardly control soaring global food and oil prices with monetary tools, like interest rates.

After all, raising interest rates impact on economic growth since it increases the cost of credit for businesses.

Since the start of the year, economic growth has slowed in the Philippines and the government has already scaled down its growth forecast for the second time this year.

It now sees growth in a range of 4.4 percent to 4.9 percent, down from its previous forecast of 5.5 percent to 6.4 percent.

The decision of BSP to keep interest rates this time comes in the heel of one bad news in the US and Europe financial markets after another. The US legislators recently passed a $700 billion bailout package in the hope of jumpstarting an economy that seems crippled by a troubled financial system. European governments, on the other hand, are dealing with the US woes contagion effects.

The BSP said that while it is maintaining its 9 to 11 percent forecast for average inflation this year and 6 to 8 percent in 2009, it said there is a greater possibility of hitting the lower end of its forecasts. It said inflation seemed to have peaked, but did not give details.

The bank said in a statement after a policy meeting that the price outlook was improving and that inflation should slow to a single digit by the first quarter of 2009.

It said the inflation in September, to be announced on Tuesday, should close to the lower end of an 11.8 to 12.7 percent band.

"Rising prices have shown significant easing in the last few months," deputy Governor Diwa Guinigundo told reporters.

In a statement, BSP said "There are early signs of improving inflation expectations with the easing of oil and rice prices." 

It made no explicit reference to slowing growth, but said it remained "committed to undertake policy actions that will help maintain the public's confidence in the financial system".

Bond markets are starting to price in the risk of lower rates globally, including the possibility of coordinated cuts by the world's major central banks.

Nine of 11 economists polled by Reuters last week had forecast the Philippine central bank would keep overnight rates steady to protect growth. Two had forecast a rate rise.

In Asia, China and Taiwan cut their policy rates last month to cushion their economies from a global downturn. Since a flood of money from central banks has had limited impact on loosening global credit markets, a round of cuts in official interest rates may be the next step. - with Reuters