Philippines cuts policy rate

The Philippine central bank cut interest rates yesterday for the third time this year, citing the domestic economy’s need for extra help amid an uncertain global climate.

The bank lowered the key overnight lending rate by 25 basis points to 5.75 per cent and the overnight borrowing rate by the same portion to 3.75 per cent.

 While inflation is likely to settle near the lower end of the government’s 3-5-per-cent target range for this year and next, the policy-setting monetary board believes global economic prospects are likely to remain weak, it said.

 “While the Philippine economy can rely on the resilience of domestic spending to sustain growth, additional policy support would serve as a buffer against strong global headwinds,” it said in a statement.

 “On balance therefore the benign inflation outlook provides room for a reduction in policy rates as a pre-emptive move against the risks associated with the global slowdown.”

 Lower interest rates provide easier access to capital for business, which observers say is crucial for job creation in an economy where a fourth of the labour force is out of work or underemployed.

The latest central bank action followed two equivalent cuts to the two key rates on January 19 and March 1.

The economy grew 3.7 per cent last year, but the expansion picked up to 6.4 per cent in the three months to March.

Last week the World Bank raised its 2012 growth forecast for the Philippines to 4.6 per cent from 4.2 per cent, following the stronger-than-expected start to the year.

 However, it warned the crisis in Europe and a Chinese slowdown could affect key export markets and cause job losses in electronics and other manufacturing industries. The Philippines central bank hinted it might further cut its key policy rates, which were already at their record lows, to prevent inflation from falling below target range.

Central bank Governor Amando Tetangco Jr said an inflation rate that was too low was as bad for the economy as an excessively high inflation rate.

He said the central bank’s job was to prevent inflation not only from exceeding the target but also from falling below the target.

Tetangco on Tuesday said the central bank had room to tweak policy as he projected the annual inflation in July to hit between 2.6 per cent and 3.5 per cent, reinforcing the bank’s view that inflation would average near the lower end of its 3-5 per cent target this year.

In June, the inflation rate hit 2.8 per cent, bringing the first semester average to 3 per cent.

“The inflation average over the policy horizon is still expected to fall closer to the lower end of our target range,” he told reporters in a mobile text message.

“Our current view is that there is some scope to adjust monetary policy settings to protect the inflation target on the downside,” he said.

He added that the BSP would continue to monitor global developments, like movements in international commodity prices and shifts in investor appetite that might affect capital flows to assess their potential impact on domestic inflation and growth.