By JIMMY CALAPATI

The Bangko Sentral ng Pilipinas has decided to provide liquidity to the financial system, slashing banks’ reserve requirements by two percentage points and doubling the repurchase facility.

By pouring P80 billion in the financial system starting with P20 billion last Friday and P60 billion this coming Friday it hopes to give banks the cash to keep operations humming.

The P80 billion will also give banks the cash to replenish funds being taken out by nervous investors.

The twin moves enabled the central bank to stave off for a few more weeks, cutting the key interest rates that may stoke inflation.

The BSP, whose primary duty is to keep prices stable, continues to be very wary of imported inflation.

Although inflation has tapered off from August’s 17-year high of 12.5 percent, year-to-date inflation is still at 9.4 percent compared with 2.7 percent last year.

Standard and Poor’s says that "inflation remains the predominant challenge" for the country.

"As the largest importer of rice and a net importer of oil, the Philippine economy is highly vulnerable to external shocks. This is obvious from the rapid rise in core inflation in the corresponding period," S&P said.

According to S&P, the economy saw 4.7 percent and 4.6 percent growth in the first and second quarters of 2008 following higher-than-expected growth of 7.3 percent in fourth-quarter 2007 as high commodity prices suppressed domestic demand.

Private domestic demand and government consumption moderated in second-quarter 2008 but investment growth rebounded.

Private demand continues to be underpinned by healthy remittance inflows, which increased at 12.1 percent in the first half of 2008.

Philippine Equity Partners, Inc. (PEP) said that the continued up-tick in core inflation, which stood at 7.8 percent from 7.5 percent in September, "justifies the decision of the monetary authorities to keep policy rates unchanged, resisting call for them to cut interest rates even as monetary authorities have shifted from managing inflation to managing growth."

Jojo Gonzales, PEP analyst, said he expected inflation to stay in double digits, between 10 to 12 percent, in the fourth quarter.

PEP says average inflation for 2008 will be 9.5 percent, slowing down to 6.3 percent in 2009.

ING Financial Markets Research said that the rising core inflation and weak peso warrant BSP’s resistance to rate cuts, to be taken up at its next policy meeting on Nov. 20.

"(BUT) we believe the BSP will use the seasonal strengthening of the peso due to increased OFW inflows in December as the opportunity to cut policy rate," ING analyst Prakash Sakpal said.

ING sees the Monetary Board cutting its key rates by 25 basis points at its December 18 meeting. The BSP expects inflation to surpass government targets for this year and the next before reaching a "target-consistent path by 2010."

The government expects inflation to fall within the range of 9-11 percent this year and 6-8 percent in 2009.

Economists expect the BSP to keep its key interest rates unchanged at its next policy meeting on November 20, despite slower inflation rate and the orchestrated rate cuts by major central banks around the world last month.