Philippine central bank cuts rate
Friday, July 13, 2007
THE Philippine central bank outfoxed investors yesterday by slashing its headline overnight borrowing rate by 150 basis points, the first cut in four years, as it reduced its inflation forecast for the year.
The central bank offset the impact of the cut by removing a tiered scheme for cheaper overnight money, which had reduced rates by up to 400 basis points on deposits in excess of 10 billion pesos ($330 million).
"The monetary board decided to maintain a neutral monetary policy stance by implementing two complementary moves," Central Bank Governor Amando Tetangco said in a statement.
The first rate change since October 2005 brought the overnight borrowing rate to 6 per cent from 7.5 per cent. A 175 basis point cut in the lending rate took it to 8 per cent from 9.75 per cent.
"It's a surprise, in fact that would be an understatement," said Vishnu Varathan, economist with Forecastweb.
"This was not seen coming at this time, but this was a combination that was seen coming."
All 11 analysts polled by Reuters earlier this week had expected the central bank to keep rates unchanged, taking recent comments by the central bank's deputy governor that the current policy stance was neutral as a sign the authority was happy with rate levels.
The economists had also been unanimous that the central bank would maintain the tiering scheme, which was introduced last November to encourage risk-shy banks to lend more.
It started to impact credit growth earlier this year.
Some analysts had expected the monetary authority to cut rates later this year, but the central bank decided to seize the opportunity this month with inflation hovering near 20-year lows.
The central bank cut its average inflation forecast for this year to 2.6-3.1 per cent from 3.3-3.8 per cent. The original target was for consumer price rises of 4-5 per cent for 2007 after a 6.2 per cent increase last year.
The central bank said the twin moves would keep its policy stance neutral, but analysts expected local financial markets, which were closed when the decision was announced, to react today.
"It's really difficult to gauge the overall impact whether it is a tightening or loosening of monetary conditions," said Frances Cheung, economist at Standard Chartered.
"My take is it is somewhere between neutral and slightly tightening."
Market rates were expected to rise with yields on benchmark three-month paper currently around 4.15 per cent.
The stock exchange, which finished 1.63 per cent stronger, was expected to get a boost while the peso, up nearly 7 per cent since the start of the year, was seen losing support.
Economists had expected the central bank to wait for evidence of a sustained downward trend in red-hot money supply growth before cutting headline rates.
Annual money supply growth, which has been over 20 per cent since December, eased to 21 per cent in May from a peak of 26 per cent in April after the central bank extended the availability of high-yielding deposit accounts.
Frederic Neumann, an economist at HSBC, welcomed the removal of the tiering scheme and the simultaneous rate cut.
"Before, it was difficult to gauge what the central bank was up to. Now, it should be easier to follow the monetary policy trend."
Reuters
The central bank offset the impact of the cut by removing a tiered scheme for cheaper overnight money, which had reduced rates by up to 400 basis points on deposits in excess of 10 billion pesos ($330 million).
"The monetary board decided to maintain a neutral monetary policy stance by implementing two complementary moves," Central Bank Governor Amando Tetangco said in a statement.
The first rate change since October 2005 brought the overnight borrowing rate to 6 per cent from 7.5 per cent. A 175 basis point cut in the lending rate took it to 8 per cent from 9.75 per cent.
"It's a surprise, in fact that would be an understatement," said Vishnu Varathan, economist with Forecastweb.
"This was not seen coming at this time, but this was a combination that was seen coming."
All 11 analysts polled by Reuters earlier this week had expected the central bank to keep rates unchanged, taking recent comments by the central bank's deputy governor that the current policy stance was neutral as a sign the authority was happy with rate levels.
The economists had also been unanimous that the central bank would maintain the tiering scheme, which was introduced last November to encourage risk-shy banks to lend more.
It started to impact credit growth earlier this year.
Some analysts had expected the monetary authority to cut rates later this year, but the central bank decided to seize the opportunity this month with inflation hovering near 20-year lows.
The central bank cut its average inflation forecast for this year to 2.6-3.1 per cent from 3.3-3.8 per cent. The original target was for consumer price rises of 4-5 per cent for 2007 after a 6.2 per cent increase last year.
The central bank said the twin moves would keep its policy stance neutral, but analysts expected local financial markets, which were closed when the decision was announced, to react today.
"It's really difficult to gauge the overall impact whether it is a tightening or loosening of monetary conditions," said Frances Cheung, economist at Standard Chartered.
"My take is it is somewhere between neutral and slightly tightening."
Market rates were expected to rise with yields on benchmark three-month paper currently around 4.15 per cent.
The stock exchange, which finished 1.63 per cent stronger, was expected to get a boost while the peso, up nearly 7 per cent since the start of the year, was seen losing support.
Economists had expected the central bank to wait for evidence of a sustained downward trend in red-hot money supply growth before cutting headline rates.
Annual money supply growth, which has been over 20 per cent since December, eased to 21 per cent in May from a peak of 26 per cent in April after the central bank extended the availability of high-yielding deposit accounts.
Frederic Neumann, an economist at HSBC, welcomed the removal of the tiering scheme and the simultaneous rate cut.
"Before, it was difficult to gauge what the central bank was up to. Now, it should be easier to follow the monetary policy trend."
Reuters
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