Philippine Central Bank Unexpectedly Cuts Key Rate

Oct 4, 2007 - The Philippine central bank unexpectedly cut its benchmark interest rate for the second time this year to stoke an economy growing at its fastest pace in two decades.

Bangko Sentral ng Pilipinas lowered its overnight borrowing rate by a quarter percentage point to 5.75 percent. Only three of 12 economists in a Bloomberg News survey expected a cut, while the others predicted no change. The benchmark is at its lowest level since 1992.

"Economic growth is rising, money supply growth has been slowing down, inflation is clearly under control," Jonathan Ravelas, an economist at BDO Unibank in Manila, said after today's announcement. "The rate cut clearly highlights that the central bank is very comfortable." Ravelas had expected the rate to be kept unchanged.

The central bank said inflation, close to a seven-year low, is unlikely to accelerate as gains in the peso hold down the cost of imports, including oil. The outlook for consumer price increases is 'benign' while the currency provides a 'buffer,' Bangko Sentral Governor Amando Tetangco said today.

The government forecasts the $117 billion Philippine economy will expand by as much as 6.7 percent this year, after growing at the fastest pace in two decades in the second quarter. Bangko Sentral unexpectedly reduced its benchmark to 6 percent in July.

Peso Gains

The peso has climbed 9 percent against the dollar this year, the second-biggest gain among actively traded currencies tracked by Bloomberg in Asia, and is poised for its biggest annual gain against the U.S. currency since 1994. The peso rose 0.4 percent to 44.96 per dollar today, according to Tullett Prebon Plc.

Inflation in 2007 will fall below Bangko Sentral's 4 percent to 5 percent target, the bank said today. The consumer price index rose to 2.6 percent from a year earlier in September after increasing 2.4 percent in August, according to the median estimate of 13 economists surveyed by Bloomberg News. The National Statistics Office report is scheduled for release at 9 a.m. tomorrow in Manila.

"We continue to believe that inflation is likely to accelerate, potentially restricting the central bank's ability to loosen policy significantly," Frederic Neumann, a Hong Kong- based economist wrote in a note to investors after today's cut. Neumann, who predicted today's reduction, said any further lowering would depend on monetary policy in the U.S.

Central bank Governor Amando Tetangco on Sept. 19 said there was 'room to maneuver' interest rates after the U.S. Federal Reserve lowered borrowing costs a day earlier.

Bangko Sentral will also lower the rate it pays for funds in its special deposit accounts, with payments for amounts held for six-months dropping to 6.25 percent from 6.5 percent, an official said after today's announcement.

The central bank in May extended access to the higher- interest deposit accounts to slow money-supply growth, which eased to the slowest pace in 11 months in August after surging by a record in April.