'Futher monetary easing depends on inflation outlook'


Posted at Feb 06 2009 06:41 PM | Updated as of Feb 07 2009 02:42 AM

The central bank has more room for further monetary easing this year but this would depend on the emerging inflation outlook, officials said.

The Bangko Sentral ng Pilipinas (BSP) has already upgraded its inflation forecasts for 2009 and 2010, expecting the average rate to drop back within targets as oil prices fell from historic highs last year.

But deputy central bank governor Diwa Guinigundo said the BSP still needs to get an updated assessment of inflation pressures to determine exactly how much flexibility it has this year.

Guinigundo said they agree with the analysis of the International Monetary Fund that easing of monetary policies would help offset the effects of the global slowdown on local economies.

"Yes, economies with some scope for monetary easing is well advised to do so," Guinigundo said.

"Monetary easing can help the balance sheets of the corporate sector and ensure the stability of the financial system. It can therefore help ensure financial markets functioning in an orderly way," he added.

But Guinigundo said monetary officials were less certain about the country's outlook, with economic data changing rapidly.

"It is difficult to say the remaining latitude for additional BSP easing of its monetary policy stance without updating its inflation outlook and the state of inflation expectations," he said.

Guinigundo said the central bank has been mindful of the persistence of inflation once the pressures reemerge.

"The cost of bringing it down could be high," he explained. "Hence, central banks should always calibrate its easing mode, and possibly complement it with other measures including fiscal measures, even regulatory assistance."

At its meeting on January 29, the Monetary Board decided to trim the BSP's key policy interest rates by 50 basis points to 5 percent for overnight borrowing and 7 percent for overnight lending.

The Monetary Board said it based its decision on the latest inflation outlook, which estimated inflation to fall within the target range for this year and the next, pointing out that the balance of risks to inflation was "tilted to the downside" because of easing prices of commodities, the slowdown in core inflation, significantly lower inflation expectations, and moderating demand.