Gova[euro][TM]t Efforts to Reduce Budget Deficit Helping Rein in Interest Rates

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TOKYO (Dow Jones) a" The Philippine central bank governor said Wednesday that the governmentas budget deficit-cutting efforts are helping to cap interest rates and that domestic rates are in the process of consolidating.

"Thereas been a reduction in the risk premium given the significant improvement in the fiscal position," Bangko Sentral ng Pilipinas Governor Amando Tetangco told Dow Jones Newswires and CNBC Asia Pacific in an interview in Tokyo. "Thatas why you see a reduction in domestic interest rates."

He noted that the ratio of the fiscal deficit to gross domestic product dropped to 2.7 percent last calendar year from 3.9 percent in 2004. The government forecasts it will further decline to 2.1 percent this year.

"When you look at the spreads on (Republic of the Philippines) bonds, you basically see the same story. The spreads have narrowed a" prices have gone up a" because of the improvement in sentiment and the increase in the depth of confidence that the government is taking very serious, significant steps to address the fiscal deficit issue," he said.

However, he said the risks for this year include inflation due to higher crude oil prices and excess liquidity because of the expected balance of payment surplus.

Last week, the central bank held its closely watched overnight rates unchanged, citing easing inflation pressure amid tepid consumer demand. The overnight borrowing rate was kept at 7.50 percent, while the overnight lending rate was kept at 9.75 percent.

In the first interest rate increases since October 2000, the central bank hiked the overnight borrowing rates three times for a total of 75 basis points last year.

Tetangco was in Tokyo to speak to Japanese financial and business officials about the nationas improving economic performance and to drum up investor interest. …