MANILA (Thomson Financial) - The Philippine central bank has cut banks' overnight borrowing rate to 6.0 percent from 7.50 percent previously and the overnight lending rate to 8.0 percent from 9.75, while deciding to "maintain a neutral monetary policy stance" during its policy meeting today.
Policy-makers also removed the tiered rate system for banks' placements with the central bank.
"Effective on July 13, the tiering system on placements with the central bank will be lifted, and the key policy interest rates will be adjusted to 6.0 percent for the overnight borrowing and 8.0 percent for the overnight lending," central bank governor Amando Tetangco Jr told reporters after the meeting.
Tetangco said the removal of the tiering scheme and the adjustment in interest rates will also apply to placements in the special deposit account facility of the central bank.
This is the first time since October 2005 that the central bank has adjusted its monetary policy.
Under the tier scheme, which has been in place since November 2006, lower rates were applied to banks' deposits with the central bank in excess of 5 billion pesos.
"This policy stance which is neutral relative to future inflation and output is consistent with the forward-looking orientation of inflation targeting, considering the low actual inflation, and more importantly, the benign inflation outlook over the policy horizon," said Tetangco.
Bangko Sentral ng Pilipinas deputy governor Gunigundo Diwa said the central bank expects inflation for the full year to settle at 2.6-3.1 percent, which is below the government's target of 4-5 percent.
"On the supply side, we expect better agricultural production. On the demand side, we expect monetary expansion to be left subdued," said Gunigundo.
Tetangco said in assessing economic conditions, the monetary policy board had determined that the additional liquidity management measures imposed last May "have begun to exert the desired cooling effect on liquidity conditions."
He said the tiering scheme has already helped accelerate bank lending.
"The neutral stance is appropriate given moderate demand pressures, favorable supply conditions and manageable inflation expectations."
Jonathan Ravelas, resident economist of Banco de Oro-EPCI Bank said the central bank's latest move is a pre-emptive response to inflation.
"What the central bank did is a calibrated, pre-emptive response to inflation. It already did this by earlier opening up special deposit account to government financial institutions. It has lowered domestic liquidity."
"The central bank probably feels that over the medium term, inflation could go up especially if oil prices keep creeping up," said Ravelas.
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