(Update) BSP cuts rediscount rate, ups budget

Reuters

Posted at Feb 16 2009 12:53 PM | Updated as of Feb 17 2009 12:48 AM

The Philippine central bank, Bangko Sentral ng Pilipinas (BSP), said on Monday it has cut its rediscount rate by 50 basis points and will raise the budget for the lending facility for the second time in four months to spur lending amid the economic slowdown.

The measures were the latest efforts by the central bank to boost the Southeast Asian economy and cushion the impact of a worsening global downturn.

The BSP has slashed its key overnight borrowing rate -- the rate at which the central bank pays banks for short-term deposits -- by a total 100 basis points in December and January to 5.0 percent at present, and analysts are expecting more cuts as inflation continues to ease.

That followed a surprise two-percentage point reduction in banks' reserve requirement in November, the first adjustment in reserve ratios since July 2005.

Monday's move brings the central bank's peso rediscount rate also to 5.0 percent.

Under the rediscount window, the central bank allows banks to "rediscount" some loans and securities with the central bank in exchange for short-term cash. The facility can also be used as an interim funding mechanism for banks that experience temporary liquidity constraints.

The BSP's budget for its rediscounting facility would also increase to P60 billion ($1.26 billion) from P40 billion.

"These changes would provide more liquidity and credit in the banking system to ensure the orderly functioning of financial markets should global financial conditions worsen," the monetary authority said in a statement.

"The liberalised rediscounting guidelines would enable banks to rediscount more loan papers and therefore, have access to additional funds that they can relend to the public."

The changes, approved by the monetary board last week, will take effect on March 2.

The central bank last hiked its budget for its rediscounting facility in November, doubling it from P20 billion, to allow more banks to obtain fresh cash from the central bank using promissory notes or other eligible debt for short-term liquidity needs.

In aligning the peso rediscount rate with the benchmark overnight borrowing rate, BSP Governor Amando Tetangco said: "For more effective monetary policy, all central bank monetary policy instruments should be priced off this policy rate."

The monetary board also approved an increase in the required ceiling for banks' non-performing loan ratio to 10 percentage points above the latest industry average, from the current ceiling of 2 percentage points to improve access to the rediscounting window.

The Philippines has not experienced the sort of severe tightening in the domestic interbank market that has forced many central banks around the world to flood the global banking system with cash.

Still Manila's central bank has repeatedly said it was ready to provide additional liquidity when needed.

Other measures implemented by the central bank since late last year include the opening of a short-term dollar repurchase facility and enhancing an existing peso repurchase window.