(Refiles to clarify in paragraph 12 first quarter growth was on annual basis) (For a related story, please click)
By Karen Lema
MANILA, July 8 (Reuters) - The Philippine central bank is set to make its sixth straight rate cut on Thursday, bringing its overnight borrowing rate to a record low of 4.0 percent, as it seeks to lift a slowing economy.
But this is likely to be the last leg of its seven-month long rate-cutting spree and traders will closely follow comments from central bank governor Amando Tetangco for the outlook of monetary policy.
Following are possible scenarios on what the central bank might say after it announces its policy rate decision:
SIGNAL A PAUSE ON ITS RATE-CUTTING SPREE
This is likely. Tetangco had indicated twice in the last five days that while there was still room to cut rates, monetary authorities were also thinking about an exit strategy from accommodative policies in the medium term.
Tetangco had talked about preparing for an orderly exit since last month but he had given it more emphasis in recent comments, following the example of regional peers in halting policy easing.
The central bank is likely to say that an exit strategy would be implemented only when there is clear evidence of a turnaround in economic growth.
Comments like these will likely push domestic bond yields to rise, albeit temporarily. Traders expect the central bank's anticipated approval this week of a planned global bond issue of up to $1 billion will dampen any upward pressure on yields.
Short-term Philippine yields are already below policy rates, which could mean that further rate cuts would not be of much use to businesses and other borrowers.
Still the central bank is likely to keep the door open for further rate cuts in case data shows the government's fiscal stimulus plan is not aiding an expected economic recovery and growth data in the second quarter comes in worse than expected.
The central bank has reduced interest rates by a total 175 basis points since December 2008.
It is also likely that the central bank will offer more short-term liquidity enhancing measures, instead of implementing a wholesale rate cut. The central bank is likely to opt for an increase to its budget for a rediscounting facility which banks can tap for short-term cash needs instead of lowering banks' reserve requirements.
CENBANK TO OFFER CAUTIOUS OPTIMISM OVER ECONOMY
It is likely that Tetangco will reiterate optimism that the economy will log positive annual growth this year because of increased government spending and higher domestic demand helped by slowing inflation.
The economy shrank at its fastest in two decades in the first quarter from the last three months of 2008, bringing annual growth to 0.4 percent. But the country's economic managers have ruled out a recession this year, predicting quarterly growth in the June quarter.
The bond and currency markets will likely show little reaction to these comments unless the central bank gives an indication of how the economy performed in the second quarter as that would provide them with clues on where policy rates might be headed.
The central bank is also likely to indicate the need to boost fiscal spending to encourage businesses to invest and fuel economic activity, an idea it had suggested in past policy meetings when it said policy easing was not enough to boost growth.
CENTRAL BANK TO SAY INFLATION DECELERATING
This is likely. The central bank uses an inflation-targetting scheme for monetary policy. It's likely that it will repeat earlier comments that the country was firmly on track to meet its 2009 and 2010 inflation targets of 2.5-4.5 percent and 3.5-5.5 percent, respectively.
The central bank will likely reiterate that inflation expectations remain well-anchored but cite the threat posed by rising oil prices and foreign exchange volatility to inflation.
Such comments are unlikely to rattle markets as investors reckon economic activity will be the key driver of monetary policy given tame inflation.
Indeed, the market was unmoved by government data on Tuesday showing the inflation rate falling to its lowest in more than two decades in June at 1.5 percent.
The central bank is likely to reiterate its view that inflation will likely hit bottom in the third quarter at around 1 percent and pick up in the following months to reach an average 3.4 percent by the end of the year. (Editing by Rosemarie Francisco & Kazunori Takada)