PH cuts policy rate to manage inflows, aid growth

By Karen Lema and Erik dela Cruz, Reuters

Posted at Oct 25 2012 06:59 PM | Updated as of Oct 26 2012 03:37 AM

MANILA - The Philippine central bank cut its key policy rate by 25 basis points to a new low on Thursday to help manage capital inflows that have kept the peso rising against the U.S. dollar and to boost growth amid weak external demand. 

Thursday's quarter-point cut, which most economists expected, brought the overnight rates to 3.50 percent for the borrowing window and 5.50 percent for the lending facility. 

Some analysts expect that policymakers, who have made four 25 basis-point cuts in 2012, will now keep rates on hold in the near term. 

The decision to reduce interest rates was in line with the forecasts of nine of 13 analysts in a Reuters poll. The remaining four expected no change in rates. 

"The domestic underpinnings of Philippine economic growth remain firm," said Amando Tetangco, governor of the Bangko Sentral ng Pilipinas. 

"However, additional policy support could help ward off the risks associated with weaker external demand by encouraging investment and consumption," the central bank governor said. 

The central bank also said subdued global demand may temper upward pressures on imported goods, keeping the overall outlook for inflation manageable, and allowing it to trim its inflation forecasts for this year through 2014.  


The annual inflation rate is forecast to average near the bottom of the 3 to 5 percent target band for this year and next, allowing policymakers to keep an accommodative monetary policy. 

There's been heavy flows of capital this year into the Philippines, whose economy grew an annual rate of 6.1 percent in January to June, outpacing the full-year growth target of 5-6 percent. 

The Philippine peso has gained 6.4 percent against the dollar so far this year, making it the best performing emerging Asian currency, according to Thomson Reuters data. 

The latest rate cut is "directed at de-incentivising capital inflows and alleviating appreciation pressures on the peso, though we are sceptical on its effectiveness," said Radhika Rao, economist at Forecastweb PTE. 

She said she believes the rate-cutting agenda "has neared its close, as risk sentiments have stabilised tentatively." 

Global economic headwinds from a slowing Chinese economy and a recession in Europe have led other central banks in Asia to focus on boosting growth. Thailand, South Korea and Australia have cut rates this month. 


While the Philippine economy has held up well despite the global turmoil, economists said it was likely to lose some steam in the months ahead as the weak external environment keep the outlook for exports dim. 

The strong peso is partly to blame as it makes Philippine-made goods more expensive. The peso's rise also poses problems for families of Filipinos working and living abroad as it reduces the buying power of the foreign currency remittances. 

"The cut was both to further support investment and consumption, as external demand remains weak. But most importantly, this is to address concerns about capital inflows," said Trinh Nguyen, economist at HSBC in Hong Kong. 

In August, year-on-year exports fell the most in eight months, dragged by a fifth consecutive month of contraction in electronics shipments. The data cast doubt on the government's 2012 goal of increasing exports by 10 percent over last year. 

But electronic imports, which are assembled to go into exports, have posted annual gains in July and August, fuelling hopes of a recovery in time for Christmas-related spending. 

Economists in a Reuters quarterly poll in October forecast annual economic growth of 5.5 this year, well within the government's 5 to 6 percent goal. Growth next year is forecast to slow to 5.3 percent, below Manila's 6 to 7 percent growth target.