Philippines lowers policy rates in view of 'benign' inflation trends

By Marisa Wong

Madison, Wis., Jan. 19 - The Monetary Board of the Bangko Sentral ng Pilipinas decided to reduce its overnight policy interest rates at its meeting on Thursday, according to a news release from the bank. The overnight borrowing or reverse repurchase facility rate has been reduced by 25 basis points to 4¼% and the overnight lending or repurchase facility rate to 6¼%, effective immediately.

The interest rates on term reverse repurchase facilities, repurchase facilities and special deposit accounts were also lowered accordingly.

The board said it decided to lower the rates after assessing that the inflation outlook remains comfortably within the target range, with expectations well-anchored. Recent baseline forecasts show that average annual inflation rates are likely to fall within the lower half of the 3% to 5% target range up to 2013.

The board mentioned in the release that pressures on global commodity prices have lessened amid weaker global growth prospects. However, the impact of strong capital inflows on domestic liquidity and the effect of geopolitical tensions in the Middle East and North Africa on oil supplies will continue to pose upside risks to inflation.

In the release, the board said it considers the overall balance of global economic activity to be tilting toward a further slowdown. The board noted that although the U.S. economy has been showing signs of improvement, it remains vulnerable to financial market volatility amid continued concerns about long-term fiscal sustainability.

At the same time, the economy of the European Union is weaker with interlocking sovereign debt and banking problems weighing down on global sentiment.

The board feels that amid these global developments, the Philippine economy is likely to face external headwinds in 2012. While the Philippine economy continues to expand, sustained domestic spending is expected to compensate for weaker external demand.

The bank concluded that the "benign" inflation outlook allowed for the reduction in policy rates to help boost economic activity and support market confidence.

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