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Bangko Sentral Cuts Key Policy Rates Anew by 50 Basis Points

02.09.2001

The Monetary Board decided  today to cut further by 50 basis points the overnight RRP and RP rates to 11.0 percent and 13.25  percent, respectively, effective Monday, 12 February  2001.  This marks a cumulative reduction in the BSP’s policy rate cuts by 400 basis points since 4 December 2000.  Such rate cuts would effectively bring back the policy rates to the pre-October  13, 2000 levels. 

The Tiering system shall continue to apply for overnight placements of banks under the  RRP window as follows: 11.0 percent for placements of up to P5 billion, 9.5 percent for the next  P 5 billion and 8.0 percent for placements in excess of P 10 billion. 

We expect that the rate cuts would lead to a reduction in the capital cost`s of corporates and the government. At the same time we do not expect much downside in the peso given that stability has returned in the foreign exchange market, as the market has reacted positively to the business-friendly stance of the administration.  In addition, the monetary easing is not expected to unduly narrow the interest rate differential given that the US FED’s warning on the risk of  “economic weakness in the foreseeable future” suggests further reduction in US interest rates. 

The successive reductions in the BSP’s policy rates since December 2000 are aimed at steering the country’s economic recovery towards a sustained path.  However, inflationary risks   emanating from the demand side — such as possible pressures coming from the fiscal sector — could feed on inflationary expectations.  These considerations underscore the need for   calibrated cuts in policy interest rates to curb inflationary consequences.  The BSP thus will remain alert against future inflationary threats.

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