The Monetary Board decided today to reduce by another 25 basis points the Bangko Sentral’s overnight borrowing and lending rates to 7.0 percent and 9.25 percent, respectively, effective Friday, 15 March 2002. This move marks the third policy rate cut since the beginning of the year for a cumulative reduction of 75 basis points. This brings the BSP’s policy rates to a ten-year low. The last time the overnight RRP rate reached 7.0 percent was in 1992.
The Monetary Board believes that, on balance, the inflation outlook remains generally subdued, given favorable food supply conditions and broad stability in the exchange rate combined with continued softness in demand and spare capacity in manufacturing.
The Monetary Board believes that this policy move would help create conditions for promoting increased bank lending activities and propelling domestic demand. In particular, the reduction in the BSP’s policy rate cut could pave the way for further decline in bank lending rates, which would enhance the repayment capabilities of corporates. It may be noted that the successive monetary easing has influenced the downtrend in bank lending rates, with bank lending rates declining by a total of 856 basis points compared with 775 basis points decline in the BSP’s policy rates for the period December 2000-February 2002. The decline in interest rates, in turn, would help ease pressures on banks’ NPLs and create conditions for more vigorous bank lending. A further reduction in the BSP’s policy rates could, therefore, be viewed as growth spurring.
The Monetary Board also approved an adjustment in the interest rates on banks’ overnight RRP placements with the BSP under the tiering scheme as follows: 7.0 percent for placements of up to P5 billion, 4.0 percent for the next P5 billion, and 1.0 percent for placements in excess of P10 billion.
Looking forward, monetary policy will continue to be on a cautious footing. While inflationary risks have lessened, they are still present. In the months ahead, the BSP will continue to monitor closely factors affecting the inflation outlook—particularly the trend in oil prices and power rates and any impact of the El Niño weather phenomenon on food supply at the latter part of the year—to ensure that inflationary risks are addressed appropriately, in line with the BSP’s mandate of maintaining price stability as the economy builds up momentum.