Central bank sees room for lower policy rates

Reuters

Posted at Feb 17 2009 07:56 PM | Updated as of Feb 18 2009 03:56 AM

The Philippine central bank sees room for more interest rate cuts this year with inflation continuing to slow, deputy central bank governor Diwa Guinigundo said on Tuesday.

"There is scope for further monetary easing if the outlook for inflation continues to improve and inflation expectations continue to be well-anchored," Guinigundo told an economic forum.

The central bank's baseline forecast shows average inflation this year will reach 3.9 percent, sharply lower than a 10-year high of 9.3 percent in 2008.

Analysts have said the central bank should reduce its policy rates further to support domestic demand and protect growth, which is expected to hit as low as 3.7 percent this year from 4.6 percent in 2008.

The central bank is widely expected to reduce rates by another half percentage point at its policy meeting on March 5.

The central bank has lowered rates by a total 1 percentage point in the last two months after inflation steadily came down from a near 17-year peak of 12.5 percent in August.

The overnight borrowing rate now stands at 5 percent and 7 percent for overnight lending.

The country's economic managers were considering lowering the government's estimate for average annual inflation this year to 3-5 percent from an earlier forecast of 6.8 percent, a government source said.

The central bank has said growth in remittances from Filipinos working overseas -- a key driver of consumer spending -- will slow this year to about 3-6 percent from a 13.7 percent growth in 2008, helping keep the country's balance of payments in a surplus.

Foreign direct investments should also stay positive this year, supported by continued flows to the manufacturing sector, primarily shipbuilding, and the mining industry, Guinigundo said.