Philippines Cuts Key Rate for First Time in 11 Months

By Francisco Alcuaz Jr. and Clarissa Batino

Dec. 18 (Bloomberg) -- The Philippine central bank cut its benchmark interest rate for the first time since January to boost economic growth as it forecast inflation will slow to less than the targeted pace in 2009.

Bangko Sentral ng Pilipinas reduced the rate it pays banks for overnight deposits to 5.5 percent from 6 percent, Governor Amando Tetangco told reporters in Manila today. The decision was expected by four of 13 economists in a Bloomberg News survey. Six had predicted a quarter-point cut, one forecast a reduction to 5.25 percent, and two expected the rate to be left unchanged.

“With inflation pressures continuing to recede, there is a greater latitude to ease policy rates,” Tetangco said. “A reduction in policy rates would help avoid credit tightness.”

The Philippines joins countries from the U.S. to Malaysia in lowering borrowing costs as easing inflation allows policy makers to focus on countering the global economic slump. Bangko Sentral had refrained from cutting interest rates in the past two meetings on concern the peso’s drop to a two-year low last month may stoke prices anew by making imports more expensive.

“The world economy is crumbling and I imagine eventually the Philippine economy will feel some of the drag,” said David Cohen, an economist at Action Economics in Singapore. “All other central banks are cutting rates so they have more room without so much fear about pressure on the peso.”

‘Done Enough’

The peso rose to its highest in almost three months and government bonds gained today ahead of the decision, which came after markets closed. The peso has strengthened more than 6 percent since falling to 50.19 a dollar on Nov. 21, as the 8 million Filipinos overseas sent more money home for the year-end holidays.

“Given the information we have, we have done enough” for now, Deputy Governor Diwa Guinigundo said today, adding that the government also needs to “provide pump priming” to help the economy. “Future action will depend on information we will get when we meet.”

The central bank expects inflation to average 5.5 percent next year, lower than its target range of 6 percent to 8 percent, Guinigundo said. The bank forecasts inflation will average 5.25 percent in 2010, within its target of 3.5 percent to 5.5 percent.

The rate cut follows the U.S. Federal Reserve’s Dec. 16 decision to reduce the country’s main interest rate to as low as zero for the first time. Central banks from the U.K. to India have cut interest rates as a global credit crunch pushed the U.S., Europe and Japan into a recession.

The Philippine government says economic growth may dwindle to as little as 3.7 percent next year, the slowest pace in eight years. Inflation slowed to 9.9 percent last month from a 16-year high of 12.5 percent in August after rice and oil prices fell. The full-year average will be about 9 percent, Economic Planning Secretary Ralph Recto said yesterday.

To contact the reporters on this story: Francisco Alcuaz Jr. in Manila at falcuaz@bloomberg.net; Clarissa Batino in Manila at cbatino@bloomberg.net.