Philippine Central Bank Favors Easing Rates as Inflation Cools

By Clarissa Batino

Dec. 16 (Bloomberg) -- The Philippine central bank said it favors cutting interest rates as cooling inflation allows it to focus on spurring growth that’s forecast to be the slowest since 2001 next year.

“Given the space offered to us by lower commodity prices, better inflation and outlook, an easing bias defines our direction in the future,” Deputy Governor Diwa Guinigundo said in a telephone interview today in Manila.

Bangko Sentral ng Pilipinas, which kept its benchmark overnight borrowing rate unchanged in the last two meetings, may join counterparts in the region in reducing borrowing costs this week after inflation fell below 10 percent for the first time in six months in November.

The central bank will cut the key interest rate by at least 25 basis points in its meeting on Dec. 18, according to 11 of 13 economists in a Bloomberg News survey. That would be the first cut since January.

Still, the central bank “can’t be indifferent to the upside risks,” including that of a weaker currency that could fan inflation by making imports more expensive, Guinigundo said. “You have to worry about the morning after. There are risks in future inflation out of excessive monetary easing.”

Money-supply growth accelerated to more than 10 percent for the first time in nine months in September and held at more than 13 percent in October. Given that, there won’t be scope for further cuts in banks’ reserve ratio “at this time,” Guinigundo said, referring to the amount of money lenders need to set aside as reserves.

More Dollar Debt

The peso has lost 12.9 percent this year, set for its biggest decline since 2000, shortly before former president Joseph Estrada was ousted by a revolt.

The Philippine government should borrow more in U.S. dollars to help ease pressure on the peso, Guinigundo said.

“It will be useful if they borrow more in dollars so they won’t add pressure to the foreign-exchange market,” he said. Given the outlook for capital markets in 2009, it may serve the government better to “do it sooner rather than later.”

The peso has climbed 5 percent since it fell to this year’s low on Nov. 20.

The nation’s balance of payments will probably remain in surplus through 2009, Guinigundo said. “All countries are exposed to the risk of capital reversal and lower exports so we have to be conservative.”

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