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Philippines May Keep Key Interest Rate at Record-Low 4% as Inflation Ease

The Philippine central bank will probably keep borrowing costs at a record low as easing inflation gives it room to support growth amid signs the global economic recovery is slowing.

Bangko Sentral ng Pilipinas will keep its benchmark interest rate unchanged at 4 percent for an 11th straight meeting tomorrow, according to 15 of 16 economists surveyed by Bloomberg News. One predicted an increase of a quarter of a percentage point.

The Philippines has kept its key rate unchanged for more than a year, helping growth accelerate to a three-year high in the second quarter. Indonesia and Australia refrained from raising interest rates while Japan cut borrowing costs this week as the region’s policy makers shift their focus to supporting their economies after some moved to counter inflation and asset bubbles earlier this year.

“We’ve seen inflation surprising on the low side, which has reinforced the central bank’s comfortable inflation outlook,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “The Philippines has an ambitious growth target for next year so they will want to keep rates steady to help support the target.”

President Benigno Aquino, who took office in June, plans to increase government spending to a record next year to expand the economy by 7 percent to 8 percent annually from 2011. He’s seeking to boost incomes in a nation where the World Bank estimates one out of four people live on less than $1.25 a day.

Inflation Cools

Philippine inflation eased to a 10-month low last month, with consumer prices rising 3.5 percent from a year earlier, a report showed yesterday. The central bank has said it expects price gains to be within its targets for this year and next.

Policy makers “can consider keeping our policy rates steady given that no other developments will happen that will change our assessment,” on inflation, Deputy Governor Diwa Guinigundo said last month.

The Asian Development Bank last week raised its 2010 economic growth forecast for the region and said governments should sustain the expansion by refraining from tightening fiscal and monetary policies “too quickly.”

The Bank of Japan yesterday unexpectedly cut its benchmark rate for the first time since 2008, while Australia and Indonesia left their key rates unchanged. Europe’s services and manufacturing industries grew at the slowest pace in seven months and retail sales unexpectedly declined, reports showed this week.

Capital Inflows

“There will be a case going forward that they may have to raise rates, maybe next year,” Paracuelles said. For now, “the central bank will think it is really unnecessary for them to start hiking policy rates at this point, particularly in an environment where capital inflows are starting to be an issue,” he said.

Faster Philippine growth, which quickened to 7.9 percent in the second quarter, is attracting investors to the nation’s assets, driving the peso to a two-year high this week as the benchmark stock index rose to a record.

Coca-Cola Co. said last week it would boost investments in the Philippines by $1 billion over five years to expand its production and distribution, as well as develop new products.

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net

To contact the editor responsible for this story: Christopher Anstey at canstey@bloomberg.net

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