Singapore-based DBS Bank Ltd. said Tuesday the central bank should slash its key policy rates after cutting the reserve requirements for banks to spur local economic growth.

DBS said the Bangko Sentral ng Pilipinas (BSP) should consider lowering overnight borrowing and lending rates during its policy rate-setting meeting on November 20 to boost liquidity in the financial system.

"It now remains to be seen if the central bank will follow up with an interest rate cut, which we think would be helpful in providing to the weakening economy," the investment bank stated.

Instead of slashing policy rates, the BSP decided to cut the reserve requirements of banks by two percentage points to 19 percent from 21 percent on November 14. The reduction would inject liquidity in the financial system by as much as P60 billion.

"The move comes after deliberations over the effects of such a cut for the past month or so, and should not really surprise investors… This should aid the availability of liquidity in the financial system," DBS said.

To contain inflation, the central bank has jacked up its policy rates by 100 basis points since June 5 bringing the overnight borrowing rate to 6.0 percent and the overnight lending rate to 8.0 percent.
 
Inflation eased to 11.2 percent in October after peaking at a 17-year high of 12.5 percent in August. This brought the average inflation to 9.4 percent in the first 10 months of the year.

The BSP has already revised upwards its inflation forecast this year to a range of 9.0 to 11.0 percent from the original target of 3.0 to 5.0 percent.

The country's gross domestic product (GDP) growth slackened to 4.6 percent in the first half of the year from 7.6 percent in the same period last year due to the economic slowdown in the US as well as rising oil and food prices.

The government downgraded its GDP growth target this year to a range of 4.4 to 4.9 percent from 6.3 to 7.0 percent.