BSP cautious about future interest rate cuts

MANILA, Philippines - Concerns that the rise in consumer prices may top expectations have prompted the Bangko Sentral ng Pilipinas (BSP) to adopt a more tempered approach to further interest rate easing. While improved inflation outlooks provided room to loosen monetary policy in recent months, potential price pressures warranted a measured pace of rate easing, central bank Governor Amando M. Tetangco, Jr. told members of the Financial Executives Institute of the Philippines yesterday. “Given that there are possible upside risks to inflation, notably the volatility in oil prices and exchange rates, increases in utility rates and potential price pressures coming from some agriculture commodities, a more measured adjustment of policy rates is needed," he said. The BSP has cut its overnight borrowing and lending rates by a total of 125 basis points since December last year, in a bid to spur the economy amid declining inflation. The last reduction, a quarter-percentage point, was made on March 5. The central bank’s Monetary Board next meets to consider policy on April 16. Inflation peaked at 12.5 percent in August last year before dropping to 8 percent in December, with inflation averaging at 9.3 percent for the whole of 2008. In declined further in January to 7.1 percent, but inched higher again to 7.3 percent in February, due to the peso’s weakness and price increases for some oil products and other utilities. The central bank expects inflation to average at 3.9 percent this year, within the 2.5 percent to 5.5 percent target. Analysts said while inflation was a concern, there was no risk of a reversal in the general downtrend in consumer prices. “Core inflation will be of greater concern, and from that perspective we see the central bank having more latitude for rate cuts as broader disinflation trend stays intact," said Vishnu Varathan, economist at Forecastweb. Mr. Tetangco said the central bank remained committed to a market-determined exchange rate, and would only intervene in the market to avoid sharp fluctuations. “We do not have a strong peso policy," he said. “The policy of the central bank is to allow market forces to determine the rate with scope for occasional participation in the market to smoothen volatilities." The peso has fallen more than 2 percent against the US dollar since the start of the year as worries about the depth and breadth of the global economic downturn forced investors to dump risky assets. Security Bank Treasurer Rafael S. Algarra said the central bank chief’s statement could be an indication that “More or less, they are probably working on the assumption of a quarter-point cut." The BSP cut policy rates by 50 basis points twice in December and January, but slowed its easing to 25 basis points this month amid the higher February inflation results. - Paolo Luis G. Montecillo, BusinessWorld with a report from Reuters