Philippines Refrains From Cutting Interest Rate to Support Peso

By Clarissa Batino and Karl Lester M. Yap

Nov. 20 (Bloomberg) -- The Philippine central bank kept its benchmark interest rate unchanged for a second month on concern a cut in borrowing costs would weaken the peso, set for its biggest decline since 2000.

Bangko Sentral ng Pilipinas maintained the rate it pays banks for overnight deposits at 6 percent today, Governor Amando Tetangco told reporters in Manila. The decision was predicted by 7 of 16 economists in a Bloomberg News survey. Nine expected the bank to lower the benchmark.

Bangko Sentral has reduced the amount of deposits it requires banks to hold in reserve and approved a dollar-lending facility to increase liquidity, rather than join counterparts in India and China in cutting interest rates to boost growth amid a global recession.

``The central bank will let the dust settle on the previous changes they made,'' said Benedicto Jose Arcinas, treasurer at Export & Industry Bank in Manila. ``Bringing the rate down and adding liquidity may aggravate the already deteriorating foreign-exchange situation.''

The peso has dropped 17 percent this year, making it the fourth-worst performer among 10 Asian currencies tracked by Bloomberg. A decline of that magnitude for the full year would be the biggest since 2000, shortly before former President Joseph Estrada was ousted from office by a popular revolt in January 2001.

The peso's drop is eroding the value of local assets and threatening to swell the nation's $33 billion foreign-currency obligations.

`Historically Low'

Interest rates are ``already low, historically,'' central bank Deputy Governor Diwa Guinigundo said Nov. 18, explaining why Bangko Sentral may not cut rates. ``Second, the real interest rate is negative and, third, there may be pressure on the peso.''

Bangko Sentral kept its key interest rate unchanged last month, halting three successive increases that began in June. Inflation has eased since reaching a 16-year high in August, slowing to 11.2 percent in October.

That gives the central bank room to move as economic growth cools in the coming months. Expansion in the Southeast Asian nation may slow to an eight-year low of 3.5 percent next year while average inflation will likely ease to 6 percent, the International Monetary Fund said last week.

Bangko Sentral has ``flexibility in determining policy rates'' because of easing prices, Tetangco said last week.

To contact the reporter on this story: Clarissa Batino in Manila at cbatino@bloomberg.net.