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Philippines cuts rate 25 bps to 3.5% on 'benign' inflation

October 26, 2012 Central Bank News
The central bank of the Philippines cut its key policy rate by 25 basis points to 3.50 percent, as expected by many economists, as low inflation gave Bangko Sentral ng Pilipinas (BSP) room to strengthen domestic activity while global economic prospects continue face considerable headwinds.

BSP described the inflationary environment as "benign," saying forecasts indicate that inflation will remain on target from this year to 2014 and the risks to inflation are balanced.

The central bank has now cut the rate on its key overnight borrowing, or reverse purchase facility, four times this year for a total reduction of 100 basis points. The overnight lending rate was also cut by 25 basis points to 5.50 percent.

The Philippine inflation rate eased to 3.6 percent in September from 3.8 percent and the BSP targets annual inflation of 3-5 percent.

The central bank said it would closely monitor future price and output conditions, but did not give any further signal about the future move in interest rates.

The Philippine economy expanded by an annual 5.9 percent in the second quarter, down from 6.4 percent in the first, and the central bank said the domestic economy remained strong, but "additional policy support could help ward off the risks associated with weaker external demand by encouraging investment and consumption."

"World economic conditions are likely to remain tepid as fiscal and financial sector stresses in advanced economies continue to dampen market confidence," the bank added.

Financial markets had expected the BSP to cut rates, not only to bolster the economy but also in an attempt to stem the appreciation of the peso currency, which is above the 2012 exchange rate assumed by the bank.

The BSP made no mention of the currency in its statement.
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