Bangko Sentral preempts Alan Greenspan

This is one experiment that central bankers in Asia should follow closely: The Monetary Board of the Philippines has pre-empted a possible US Federal Reserve interest rate cut .

The brave reduction of the Bangko Sentral's (central bank) key interest rate by 50bp cut, adopted during the March 8 regular board meeting, was unexpected.  BSP Governor Rafael Buenaventura has been firm in his policy of lowering interest rates, but timing has always been patterned after that of the US monetary policy.

This time, the Bangko Sentral proactively lowered rates without waiting for the results US Federal Reserve committee meeting scheduled for March 20. Newly appointed National Treasurer, Sergio Edeza has favored a pre-emptive rate cut, while Buenaventura earlier indicated he would rather wait for the US monetary action.

The day after the announcement, the stock market closed 1.18 points lower at 1,588, while the peso inched Ps0.02 to a stronger Ps47.982 at the Philippine Dealing System, the country’s intra-bank currency trading platform.

The Monetary Board’s decision was supported by its observation of the “broad stability in the foreign exchange market,” and “favorable inflationary expectations.”

The rate cuts will be effective Monday, March 12. This recent action brings the cumulative reduction to 450 points since December 4, 2000. The new rates are even lower than the level on October 13 last year, when the Monetary Board started a series of rates increases, when the peso tumbled at the news of former President Joseph Estrada’s involvement in gambling and corruption.

After the cut, the overnight RRP (reverse repo) rate will be 10.5%, while the RP (repurchase) rate will be 12.75%. This is the sixth rate cut of the year.

The tier system for overnight placement by banks under the RRP window will be maintained. For placements up to Ps5 billion, the rate will be 10.5%, for the next Ps5 billion it will be 9%, and for placements over Ps10 billion, it will be 7.5%.

The Monetary Board is the highest monetary policy-making body in the Philippines and is chaired by the governor of the Bangko Sentral ng Pilipinas. The Finance Secretary is the vice-chairman.

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