Philippine Interest Rates May Fall to Record Low, Tetangco Says

By [bn:PRSN=1] Clarissa Batino []

June 3 (Bloomberg) -- The Philippine central bank could cut the benchmark interest rate to a record low this year as economic growth weakens and inflation heads to the slowest in two decades, central bank Governor Amando Tetangco said.

“We’re in a good position because we have remaining ammunition or bullets, unlike in other countries where rates are already very low and they have little room to move down further,” Tetangco said in an interview at his office in Manila yesterday. “This gives us more flexibility.”

The central bank has cut borrowing costs by a total 1.75 percentage points since mid-December to 4.25 percent, in its longest easing cycle since at least 2002. Economic growth slowed to a decade low last quarter as the global recession hurt exports, adding pressure for further reductions in the key rate, which is higher than that of Malaysia, Thailand and South Korea.

“There is a lot of room to cut relative to the U.S. and other countries we benchmark with,” said Ces Tanchoco, an economist at Bank of the Philippine Islands in Manila. Still, “there’s a reversal in the oil price scenario already. They really have to look at how growth is emerging. I think they’ll be a little more cautious.”

The Philippines imports almost all of its oil.

Inflation will ease to 1 percent in the third quarter, damped by softer commodity prices, an improving exchange rate and an economy that grew the least in a decade in the first quarter, Tetangco said. That would be the slowest pace since April 1987.

Record Low

“The inflation forecast shows we will be within the target range in 2009 and 2010,” he said. “In each of these years, the forecast is below the mid-point of the target range. That would indicate that there is further room to maneuver.”

A further reduction in the key rate to 4.125, which would be a smaller cut than the last move, would bring the benchmark to the lowest level since central bank data started in 1990.

The central bank may lower its overnight borrowing rate by a quarter of a percentage point in July and then “see how the second quarter is looking,” Bank of the Philippine Islands’ Tanchoco said.

The central bank’s rate cuts will ease pressure on government bond yields that have been rising on concern the budget deficit will widen, Tetangco said.

The growing deficit will have to be seen in the context “that it’s temporary” and due to higher public spending to boost the economy, the governor said. “If the market is convinced that government is still on a fiscal consolidation path in the medium term, it may even be positive because it signals that government is ready to sustain economic growth.”

Public Spending

Public spending needs to complement monetary policy to stimulate the economy, and the government needs to ensure that money allocated for projects is “actually used,” Tetangco said.

The Philippines may cut its 2009 economic target and widen the budget-deficit estimate a third time this year as it increases public spending amid faltering revenue, Budget Secretary Rolando Andaya said June 1. The government is “committed” to boosting spending to support the $144 billion economy, Finance Secretary Gary Teves said the same day.

The government “has room” to increase borrowings from the overseas and domestic markets to fund its budget deficit, Tetangco said. The central bank’s easing stance will have to be calibrated, he added.

“At this point in time, the stance of policy is still towards easing but at the same time we remain cognizant of the fact we’ve been easing since the fourth quarter,” Tetangco said.

Inflation Risk

There are “upside risks” to inflation with oil prices rising again, he said. “We also need to look at the medium term because if there’s a need to change the stance of monetary policy at some point in the future, that change or shift should be done in a smooth adjustment.”

The local currency has strengthened 0.3 percent this year, lagging behind a 6.2 percent gain in Indonesia’s rupiah and a 1.7 percent increase in the Thai baht.

Sustained inflows from overseas Filipinos sending money home and returning appetite for the nation’s stocks and bonds will boost the nation’s balance of payments and support the peso, Tetangco said. International reserves will climb to $39.5 billion in May from $39.3 billion in April, he said.

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