(STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) hinted yesterday that it could ease local interest rates after the US Federal Reserve slashed a key rate by a hefty 50 basis points.

“The Fed decision affords the (BSP) some room for maneuver in our own rate-setting given that the outlook for inflation continues to be benign,” BSP Governor Amando M. Tetangco Jr. said yesterday.

According to Tetangco, the action of the US Federal Reserve Board was widely expected but the size of the cut and the statement that accompanies the decision had a more dramatic impact on markets.

“In addition, our assessment shows that the risks to this outlook, including liquidity growth, appear to be manageable,” Tetangco said.

Criticized by some market analysts as an overreaction to the credit woes in the US, the Fed announced Tuesday that it is reducing its target for the federal funds rate, the interest rate that banks charge each other, from 5.25 percent to 4.75 percent.

The half-point reduction was double the quarter-point move that many had expected and sparked euphoria among investors, who had been worried that the central bank would be too slow in responding to recent market turmoil.

In addition to cutting the federal funds rate by a half point, the central bank also reduced its discount rate, the interest it charges in making direct loans to banks, by a half-point as well. The Fed had also cut the discount rate on Aug. 17 as it scrambled to respond to the growing credit crisis.

Tetangco said such a move would only form part of the array of factors that the Monetary Board would examine at its next policy meeting since there were other monetary aggregates to consider.

“The action of the US Fed is among the factors we consider to the extent that it provides us with the guidelines on how it reads the market,” Tetangco said.

According to Tetangco, the BSP’s standing assessments was the possibility that the price of oil would remain at the current high level since the effect of a prolonged price hike would eventually trickle down to the demand side.

“If this level of oil prices is sustained over a prolonged period, it could push inflation rate up,” he said. “But then other things are also moving such as the peso-dollar exchange rate. We can’t speculate this early.”

The BSP slashed its headline overnight borrowing rate by 150 basis points to six percent in July — the first cut in four years — and scrapped a tiered interest rate scheme for overnight money deposited with it under which large deposits earned a lower rate.

US FeThe market viewed the twin moves as a slight tightening of monetary conditions and analysts said at the time that another cut is likely before the end of the year.

Inflation has been benign over the year despite economic growth topping seven percent in the first six months of the year. Annual inflation in August was 2.4 percent, at the lower end of the central bank’s 2.3-3.2 percent band.

The BSP has listed oil prices, high domestic liquidity growth and uncertainty in global credit markets as possible risks in its outlook.

But annual money supply growth slowed to 18.7 percent in July, the second consecutive month it was below 20 percent, the level at which the central bank has said it is comfortable with.

“We will continue to monitor these risks, particularly any prolonged volatility in oil prices, and their impact on inflation expectations,” Tetangco said.

The BSP will hold its next rate-setting meeting on Oct. 4.

Chief News Editor: Sol Jose Vanzi

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