BSP cuts overnight rates by 25 bps

The Bangko Sentral ng Pilipinas (BSP) cut its overnight rates by 25 basis points yesterday, less than expected, after robust 2007 economic growth data suggested the country could maintain its momentum well into this year.

The cut brought the overnight borrowing rate to five percent from 5.25 percent. The overnight lending rate was reduced to seven percent from 7.25 percent.

The central bank said it expected inflation this year to come in between 3.5 to 4.4 percent, well within its target range of three to five percent as a strong peso  would help mitigate price pressures.

Last year, the BSP lowered its overnight borrowing rate by a total of 225 basis points.

The monetary authority also said it would maintain the wide availability of its high-yielding, short-term, special deposit accounts, a tool it uses to mop up excess liquidity.

BSP Governor Amando M. Tetangco Jr. told a press conference that the BSP expected the 2008 inflation to fall within the three to five percent target rate, projecting the actual rate to range between 3.5 and 4.4 percent.

According to Tetangco, there were indications of demand-side pressures building up but  said the indicators showed manageable price pressures.

Pressures from the demand-side, Tetangco said, would come from possible wage rate increase and increases in utility rates as well as transport fare adjustments that might be approved this year.

But Tetangco said the Monetary Board was encouraged by the fact that core inflation remained lower than headline inflation which was a sign that the underlying trend in consumer prices was steady.

Tetangco said there were risks to the BSP’s inflation target, particularly the volatility in global oil prices but  said the impact would be tamed by the strength of the peso.

“The firm peso is expected to temper the impact of higher import costs on domestic prices,” he said.

Moreover, Tetangco said the slowdown in the US and the global economy as a whole would also moderate price pressures coming from imported oil and food.

“In addition, the reduction of the oil tariff effective in February was expected to reduce pump prices of petroleum products,” he said.

BSP Deputy Governor Diwa Guinigundo on the other hand said that there were also downside inflationary pressures that would mitigate the upside pressures stemming largely from volatile oil prices.

According to Guinigundo, the peso is expected to remain firm because of steady foreign exchange inflows and this would have a measurable impact on the prices of domestic commodities, particularly domestic pump prices.