Philippines May Cut Key Interest Rate to Record Low

By Karl Lester M. Yap

July 9 (Bloomberg) -- The Philippine central bank may reduce borrowing costs for a sixth time in seven months to boost domestic spending and shield the Southeast Asian economy from the global recession.

Bangko Sentral ng Pilipinas will lower its benchmark interest rate by a quarter of a percentage point to a record low of 4 percent today, according to 12 of 14 economists surveyed by Bloomberg News. One expects a half-point cut and another forecasts no change in the decision due at 4 p.m. in Manila.

“There is a need to signal that the preference for monetary policy is to support growth,” said Cecilia Tanchoco, an economist at Bank of the Philippine Islands in Manila.

Easing inflation has allowed the central bank to cut its key interest rate by 1.75 percentage points since mid-December to bolster growth as exports slumped. The Philippines’ $144 billion economy expanded 0.4 percent in the first quarter, the weakest pace in a decade, and the International Monetary Fund predicts the economy may contract 1 percent this year.

A government report tomorrow may show an eighth straight monthly drop in exports in May, a Bloomberg survey shows. Overseas sales, which account for about a third of the economy, have slumped as demand for Philippine-made Intel Corp. computer chips and The Gap Inc. clothing fell. Inflation slid to a 22- year low of 1.5 percent in June.

Inflation Risks

Governor Amando Tetangco and fellow policy makers may keep borrowing costs unchanged for the rest of the year after today’s move, according to economists surveyed by Bloomberg this month. A cut in the key rate to 4 percent would bring the benchmark to the lowest level since central bank data started in 1990.

“Given nascent signs of stabilization in higher frequency economic data, the pressure on central banks to respond with suitable monetary policy response has also eased substantially,” said Radhika Rao, an economist at IDEAglobal Ltd. in Singapore. “Simmering upside risks to inflation will deter the authorities from moving too aggressively to lower rates further.”

The government predicts growth will accelerate in the coming quarters as the global economy recovers. The price of oil, almost all of which the Philippines imports, has jumped more than a third this year.

Bank of Korea

The Bank of Korea kept its benchmark interest rate unchanged for a fifth month today on signs the economy is recovering from the worst global recession since the Great Depression. Australia’s central bank kept interest rates unchanged for a third month this week, joining policy makers in Malaysia and Thailand who have also stopped cutting.

The International Monetary Fund said yesterday the global economic rebound next year will be stronger than it forecast in April as the financial system stabilizes, predicting the world economy will grow 2.5 percent in 2010.

China’s new loans surged almost fivefold in June from a year earlier, Japan’s industrial output rose for a third month in May and Australian consumer confidence jumped in July to the highest level in 19 months.

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net