The Philippine central bank kept borrowing costs at a record low as easing inflation allows it to support domestic demand, avoiding an interest-rate increase that could lure more capital flows.
Bangko Sentral ng Pilipinas left the rate it pays lenders for overnight deposits at 4 percent for an 11th meeting, according to a statement in Manila today. That’s the lowest level since central bank data started in 1990. The decision was expected by 15 of 16 economists surveyed by Bloomberg News.
“The BSP decision to keep interest rates unchanged seems to be consistent with the stable inflation outlook,” said Jonathan Ravelas, a market strategist at Banco de Oro Unibank Inc. in Manila. “Most likely, the next move in rates will come in the first quarter of 2011.”
The Philippines has kept its key rate unchanged even as neighbors from Malaysia to Taiwan raised borrowing costs this year amid an economic rebound. Now, Asian policy makers are shifting their focus to protecting the world’s fastest-growing region from the threat of a slowdown in global expansion and capital inflows that have caused their currencies to surge.
“Inflation is down and you don’t want to whack the economy,” Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila, said before the report. “The concern right now is liquidity which is potentially inflationary. There’s a lot of foreign inflows especially to the stock market and the peso is appreciating so much because of it.”
Philippine inflation eased to a 10-month low last month, with consumer prices rising 3.5 percent from a year earlier. The central bank said today it expects price gains to be within its targets through 2012, as it lowered its inflation forecast for 2010 to 3.8 percent from 4 percent.
“Inflation remains low even as demand has strengthened,” the central bank said in a statement. “Global economic conditions point to a tepid demand recovery, keeping a lid on imported price pressures. Sustained foreign-exchange inflows, which in part reflect a broader trend in capital flows in favor of emerging market economies like the Philippines, also provide a cushion to the domestic economy from imported inflation.”
The central bank will watch out for inflationary pressures to ensure that its “monetary policy settings continue to be appropriate,” it said.
Faster Philippine growth, which quickened to a three-year high of 7.9 percent in the second quarter, is attracting investors to the nation’s assets. The peso climbed to a two-year high this week as the benchmark stock index rose to a record.
All of Asia’s major currencies, except the Hong Kong dollar which is pegged to the U.S. currency, have strengthened this year as overseas investors pumped money into a region whose economies are outperforming those in the U.S. and Europe. Japan last month intervened for the first time in six years to restrain the yen and protect exporters, while China is resisting calls to let the yuan rise faster. Thailand may relax limits on money outflows, Prime Minister Abhisit Vejjajiva said yesterday.
The Philippine central bank is closely monitoring foreign- exchange flows and is “ready to take action as appropriate and necessary,” Deputy Governor Diwa Guinigundo said yesterday.
While Bangko Sentral will be “prone to act” on “wild swings” in the currency, there is “no fundamental misalignment” of asset prices in currency, real-estate and stock markets, Assistant Governor Cyd Amador said in Manila today. The Philippines may consider further relaxing its foreign-exchange rules to “make it easier” for capital to flow out, she said.
Set for Growth
The Southeast Asian nation is set for faster growth and the rising peso along with a record stock market index reflect the returning confidence of investors, President Benigno Aquino said in a speech today. Aquino, who took office in June, plans to increase government spending next year to expand the economy by 7 percent to 8 percent annually from 2011.
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.
“Growth has been fantastic but there are questions about its sustainability because of what is happening to external demand,” said Lorenzo. “That’s precisely why you don’t want to raise interest rates at this point.”
The Bank of Japan on Oct. 5 unexpectedly cut its benchmark rate for the first time since 2008, while Australia and Indonesia left their key rates unchanged on the same day.
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