The Monetary Board decided today to reduce by another 25 basis points the Bangko Sentral’s overnight borrowing and lending rates to 8.0 percent and 10.25 percent, respectively, effective Friday, 7 December 2001. This brings the cumulative reduction in the Bangko Sentral’s policy rates to 700 basis points since December last year. The policy overnight borrowing rate is the lowest since September 1995.
Encouraging price developments and the favorable inflation outlook — due in large part to broad exchange rate stability and the downtrend in local oil prices — have provided the basis for a more accommodative monetary policy setting. Prudent monetary policy easing, in turn, has given broad support to the economy’s growth objective amidst a weak external environment. Meanwhile, the significant easing stance of the US Federal Reserve has enabled us to maintain a comfortable interest rate differential, mitigating the risk of abrupt shifts of investment funds toward foreign-currency denominated assets. Thus, monetary easing is not expected to create renewed pressure on the peso.
The Monetary Board has also approved a two (2)-percentage point reduction in the liquidity reserve requirement on deposits and deposit substitute liabilities, common trust funds (CTF) and trust and other fiduciary liabilities (TOFA) of commercial banks and non-banks with quasi-banking functions (NBQBs), also effective 7 December 2001. This move is estimated to release about P26.0 billion into the monetary stream. Greater liquidity in the system could encourage a further downtrend in market interest rates. More importantly, higher liquidity could find its way to more firms as banks start lending more aggressively with the economy gathering momentum.
The Monetary Board also announced a change in the tiering system on banks’ overnight RRP placements with the BSP as follows: 8.0 percent for placements of up to P5 billion, 6.0 percent for the next P5 billion, and 4.0 percent for placements in excess of P10 billion. This measure is expected to further encourage banks to channel the additional funds to the various productive sectors of the economy.
The Bangko Sentral will continue to closely monitor risks to the inflation outlook which could constrain its ability to deliver on its primary mandate of promoting price stability conducive to balanced and sustainable growth.