The central bank's key rates were trimmed by an eighth of a point or 12.5 basis points each, with the overnight borrowing rate set at 12.875 per cent and the lending rate at 14.875 per cent.

Last Tuesday, the central bank lowered its key overnight rates by 37.5 basis points.

"It should more or less encourage borrowing from banks because interest rates have now dropped significantly," said Sergio Edeza, a former central bank treasurer and now Metropolitan Bank and Trust Co senior vice-president for funds management.

Bankers had anticipated the rate reduction after the benchmark 91-day treasury bill rate fell to 13.116 per cent from 13.22 per cent on Monday, the lowest since the start of the Asian crisis in July, 1997.

Although they were moderate, the rate cuts fuelled speculation of further reductions in the near term withthe exchange rate currently quite steady and inflation expected to slow down.

"If the intention is really to let the economy grow, I think there's a need for the rates to be brought down to a much lower level, even as low as 11.5 per cent," Edeza said.

"Lower interest rates are definitely very good for the economy because they will allow customers... to get the capital needed to generate growth," said Mark Boyne, treasurer of Hongkong and Shanghai Banking Corp in Manila.

The country is targeting growth of 3.5 per cent in gross domestic product for 1999 from about 1 per cent in 1998.

Tuesday, only marginally down on Monday's close of 38.27.

However, the peso has gained strength since the end of 1998 when it ended at 39.09 to the dollar.

"The reaction to the rate cut has been very muted. The peso has depreciated only very, very minimally by about ten centavos... which implies that there really is underlying strength in the peso," Boyne said.

Inflation for 1999 is expected to average 8.5 per centagainst 9.7 per cent last year, the government has said.

Inflation does not creep up again, we will likely see further reductions in interest rates," Boyne said.

If fund flows continued and import demand did not shoot up, the peso was likely to continue appreciating up to the 36 to the dollar level, thus creating less pressure for keeping interest rates high, Edeza said.

The government's successful $1.0 billion global bond float two weeks ago will supply more dollars to the already-dollar-heavy exchange market.

This February, the government is considering going back to the international market for a euro-denominated bond.

Although further rate cuts could push the exchange rate higher, this would serve to correct too much appreciation in the peso, analysts said.

"There is still some more room for the currency to appreciate despite any cut in rates. The cuts would probably temper the (peso's) appreciation, but I think we need to temper the appreciation given the fact that we don't like our exportsto suffer," Edeza said.