BSP expected to cut key rates by yearend

REPORT FROM BUSINESSWORLD The central bank will likely cut interest rates at the end of this year to boost economic growth, global financial giant UBS said. "Towards yearend [of] 2006, after the US economy and others [will] have slowed further, we would expect a gradual shift in regional central bank policy [with] emphasis towards pro-growth, the Philippines included," UBS Investment Research said in its latest Asian economic study, issued last August 23. UBS, however, noted that two conditions must be met before any rate cut is likely, namely, oil prices should ease and export growth should slow down. The Bangko Sentral ng Pilipinas (BSP) had said rising oil prices remain a key inflation risk. Although oil prices have gone down after reaching record highs this month, these still remain well above government estimates. The Development Budget Coordination Committee, which sets the government’s economic targets, had expected the price of Dubai crude to average $62 per barrel this year and $63/barrel next year. The Philippines, which imports 95% of its crude oil requirements, uses Dubai prices as a benchmark. Dubai price stood at $68.77 last Aug. 25, compared with an average this month of $69.57 and a July average of $69.12. The central bank raises interest rates to fight inflation by limiting money supply and slowing down economic growth by making the cost of borrowing more expensive. The overnight borrowing rate now stands at 7.5%, while the lending rate is at 9.75%. The government needs lower interest rates to encourage people to spend and invest in order to prod economic activity. President Gloria Arroyo’s administration is targeting growth of as much as 6.2% this year, although officials have said it may be capped at 5.5% due to higher oil prices. Actual first-quarter growth stood at 5.5%. The Philippines’ exports had been growing phenomenally after posting double-digit growth for six consecutive months. Export earnings for the first half of the year have risen nearly 17% to $22.74 billion. This figure has already surpassed industry players’ 10% forecast for 2006, and is more than double the government’s target of 8%. "While weaker exports would bring currency weakness as trade balances deteriorate, this is not something we would expect regional central banks to resist," UBS said. "At most, currency weakness argues for a slower unwinding of the policy rate hikes conducted in 2005," it added. The BSP raised interest rates thrice last year as a preemptive measure against inflation. UBS also said it expects the Monetary Board to keep its key rates unchanged in its next meeting. -- K. L. M. Yap/BusinessWorld