Philippines keeps money policy neutral but rate cut still possible

Manila: The Philippine central bank's monetary policy remains neutral despite cutting banks' reserve requirements on Friday but it is not closing its door on reducing interest rates, a senior official said.

Asked whether the central bank had shifted to an easing monetary stance following the two percentage point cut in banks' reserve requirements, Deputy Governor Diwa Guinigundo said: "No, we're still neutral."

Guinigundo told reporters at the weekend that the lowering of the regular reserve requirement to 8 per cent from 10 per cent, was a pre-emptive move to boost liquidity as credit conditions were tightening globally in the worst financial crisis in decades.

"The best way to pre-empt liquidity tightness without touching the policy rates is to reduce the reserve requirement," he said.

The liquidity reserve requirement stayed at 11 per cent. The cut in the regular reserve requirements takes effect from November 14.

But asked whether Friday's move meant the central bank would hold key rates steady at the next policy meeting on November 20, Guinigundo said: "We're not saying that. It is still an issue that we need to resolve during the next monetary board meeting."

The central bank will consider the results of its consumer and business expectations surveys in deciding its next policy move, he said.

Some analysts say Friday's decision may be a prelude to an interest rate cut with annual inflation slowing to 11.2 percent in October from a 17-year high of 12.5 percent in August.

The central bank kept interest rates steady at its last meeting in October after raising them by a total 100 basis points at each of the three previous meetings to fight high inflation.

Its overnight borrowing rate currently stands at 6.0 per cent and its lending rate is at 8 per cent.

Guinigundo said the slower inflation gave the central bank flexbility to cut banks' reserve requirements, which would free about 60 billion pesos ($1.23 billion) into the financial system.

The central bank last adjusted banks' reserve ratios in July 2005 when it increased both the regular and liquidity reserve requirements by one percentage point each.

Monetary authorities were not seeing any tightness in credit conditions at the moment, said Guinigundo.