Monetary officials said there is room for further monetary easing this year as the drop in inflation in January gave the Bangko Sentral ng Pilipinas (BSP) scope to support economic growth this year.
Analysts expect a further reduction in interest rates of as much as one percentage point as oil and commodity prices continued to fall on easing demand.
The Monetary Board has already cut its key policy rates by 50 basis points and according to Deputy BSP Governor Diwa Guinigundo, the BSP wants to get an updated assessment of inflation pressures to determine exactly how much flexibility it has this year.
On one side, inflationary pressures have not turned completely benign but on the other side, global economy is slowing down, underlining the need to boost economic activity through monetary easing.
Guinigundo said he agreed with the reading of the International Monetary Fund (IMF) that the easing of monetary policies would help offset the effects of the global slowdown on local economies.
“Yes, economies with some scope for monetary easing is well advised to do so,” Guinigundo said. “Monetary easing can help the balance sheets of the corporate sector and ensure the stability of the financial system.”
“It can therefore help ensure financial markets functioning in an orderly way,” he added.
But Guinigundo said monetary officials are less certain about the country’s outlook, with economic data changing rapidly.
“It is difficult to say the remaining latitude for additional BSP easing of its monetary policy stance without updating its inflation outlook and the state of inflation expectations,” he said.
Guinigundo said the central bank was mindful of the persistence of inflation once the pressures reemerge.
“The cost of bringing it down could be high,” he explained. “Hence, central banks should always calibrate its easing mode, and possibly complement it with other measures including fiscal measures, even regulatory assistance.”
At its meeting last Jan. 29, the Monetary Board decided to reduce, effective immediately, the BSP’s key policy interest rates by 50 basis points to five percent for the overnight borrowing or reverse repurchase (RRP) facility and seven percent for the overnight lending or repurchase (RP) facility.
The interest rates on term RRPs, RPs, and special deposit accounts (SDAs) are also adjusted accordingly, the second time that the central bank eased its rates since December last year.
Meanwhile, Socioeconomic Planning Secretary Ralph Recto is urging the Bangko Sentral ng Pilipinas (BSP) to lower interest rates saying that this would help the government attain the higher end of its gross domestic product (GDP) target of 3.7 percent to 4.7 percent for 2009.
Recto said that with easing inflation, it would be easier for monetary authorities to reduce interest rates.
“Given a sustained lower inflation, it would be easier for the BSP to further reduce interest rates. This will decrease the cost of doing business and increase investments and consumption,” Recto said.
The central bank’s overnight borrowing rate is currently at five percent while the overnight lending rate is currently at seven percent.
The National Statistics Office (NSO) has reported that headline inflation rate dropped to 7.1 percent in January from eight percent last month.
The National Economic and Development Authority (NEDA) chief said that inflation is likely to sustain its decline given the downtrend in global oil prices.
This, he said, would help spur domestic consumption as it strengthens the purchasing power of consumers.
“Inflation is a critical factor to spur consumption. With a lower rate, people would have more purchasing power. Their real income has more value. Given this, I don’t think they are going to spend less,” Recto said adding that the January headline inflation rate is already within the government’s target of six percent to eight percent for 2009.
He said that to sustain the lower inflation rate, productivity must be increased.
“We have to increase productivity particularly in food especially now that fertilizer costs have been reduced to 50 percent. And we are hoping for a better performance of agriculture this year. That would in turn benefit farmers and increase their income,” he said.
He said that with the continued drop in world oil prices, oil companies further slashed domestic pump prices to an average P32.16 per liter in January 2009 from P34.64 per liter in December 2008.
The price of unleaded gasoline, he said, went down from P34.63 per liter to P32.86 per liter in January while diesel prices decreased from P34.61 per liter to P31.40 per liter.