Philippine Central Bank Cuts Key Rate

The Philippine central bank cut its key interest rate and ended a policy of staggering borrowing costs depending on the size of deposits, effectively keeping the cost of lending in the $117 billion economy unchanged.

Bangko Sentral ng Pilipinas lowered the reverse repurchase rate by 1.5 percentage points to 6 percent, Governor Amando Tetangco told reporters in Manila today. It also scrapped a policy of paying lower rates of interest on large deposits placed with the central bank.

The staggered-rate policy was introduced in November to encourage banks to lend money even as it kept its benchmark rate unchanged to cool inflation. Bank loans grew 12 percent in April, the fastest pace in six months. Inflation fell to 2.3 percent in June, close to a seven-year low.

``The cut effectively keeps central bank borrowing costs neutral,'' said Jose Emmanuel Hilado, head of trading at Banco de Oro-EPCI Inc. in Manila.

In November, the bank cut payments for overnight deposits of between 5 billion pesos ($109 million) and 10 billion pesos to 5.5 percent, while sums in excess of 10 billion attracted a 3.5 percent rate. That put borrowing costs between 5.5 percent and 6 percent, Hilado said.

``Measures implemented in May have begun to exert the desired cooling effect on liquidity conditions,'' central bank Governor Amando Tetangco told reporters at a briefing today. ``The neutral stance of monetary policy is appropriate.''

`More Transparent'

``It could slow bank lending a bit,'' said Robert Subbaraman, chief economist at Lehman Brothers Asia Ltd. in Hong Kong. ``The effect will be fairly neutral.''

Bangko Sentral had held its key interest rate at 7.5 percent from October 2005 until today. The 6 percent rate is the lowest since Bloomberg began tracking the benchmark in 1993.

``Today's move represents a normalization of monetary policy,'' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong. ``Central bank policy has become more transparent.''

Bangko Sentral in May extended access to higher interest- paying deposit accounts to government pension funds, state companies and some investment trusts to slow the pace of growth in domestic liquidity. The deposits had previously only been open to banks.

Growth in the Philippines' broadest measure of money supply eased to 21.1 percent in May from 26.3 percent in April. The central bank targets a 20 percent ceiling on money entering the economy. The economy expanded 6.9 percent in the first quarter from a year earlier, accelerating from a 5.5 percent pace in the previous three months.

The Philippines had been trying to stem the amount of money entering the economy amid concern that remittances sent home from workers abroad will fan inflation.

source:bloomberg.com