Philippines Trims Interest Rates Unexpectedly

philippines 072612

The Philippine central bank decided to slash its benchmark interest by 25 basis points in an unexpected move on Thursday, citing receding price pressures and a shift in the risks to inflation outlook to the downside.

The Monetary Board of the Bangko Sentral ng Pilipinas trimmed the reverse repurchase rate to a record-low 3.75 percent from 4 percent, marking the third reduction so far this year. Similarly, the bank cut the repurchase rate to 5.75 percent from 6 percent.

The bank was expected to leave the rates unchanged. The BSP has lowered the rates by 75 basis points this year.

The central bank forecast inflation to settle within the lower half of the 3-5 percent target for 2012 and 2013, as pressures on global commodity prices are seen to continue to abate amid weaker global growth prospects. Inflation fell to a three-month low of 2.8 percent in June from 2.9 percent in the preceding month.

Nonetheless, the bank said it will watch potential upside risks to inflation like pending electricity rate adjustment, higher prices for food products due to the prolonged drought in the U.S. and firm domestic demand pressures.

The central bank noted that while the Philippine economy can rely on the resilience of domestic spending to sustain growth, additional policy support would serve as a buffer against strong global headwinds.

"On balance therefore the benign inflation outlook provides room for a reduction in policy rates as a pre-emptive move against the risks associated with the global slowdown," BSP said.

The International Monetary Fund forecast the Philippines' economic growth to stabilize at around 4.8 percent and 4.9 percent in 2012 and 2013, respectively. The economy expanded 6.4 percent year-on-year in the first quarter.

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