In its meeting today, the Monetary Board decided to reduce by twenty five basis points the Bangko Sentral’s overnight borrowing and lending rates to 8.75 percent and 11.0 percent, respectively, effective Friday, 5 October 2001. This brings the cumulative reduction in the BSP’s policy rates to 625 basis points since December last year.
The Board said that there is some room for monetary easing given that the inflation performance for 2001 is expected to be within target and given that the outlook shows relatively subdued inflationary pressures. The rate cut will have the positive side effect of being growth-supporting in the face of a weak external environment due to the expected downturn in the US economy and other global uncertainties. This would also allow the economy to build upon the better-than-expected growth performance in the second quarter, which was primarily internally generated.
Moreover, the reduction in interest rates by many Central Banks—including the 100 basis points cut by the US FED since September 11—has also provided the BSP with leeway to cut policy interest rates, without fueling concern over a shift away from Peso-denominated assets inasmuch as interest rate differentials do not narrow. These factors are seen as positive for the Peso, which in turn can help keep inflationary pressures in check.
The Bangko Sentral will continue to monitor economic developments and financial markets closely in order to ensure that the monetary setting is supportive of the economy’s growth and inflation objectives.