Philippines Holds Key Rate as Inflows Spur Risk of Asset Bubble

The Philippines refrained from cutting benchmark borrowing costs and moved to reduce the rate on special deposit accounts to curb capital inflows that threaten to create asset-price bubbles.

Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, according to a statement in Manila today. The decision was predicted by all 20 economists surveyed by Bloomberg News. The central bank also set the rate on all special deposit accounts at 3 percent to ensure “adequate” liquidity.

Emerging-market policy makers are grappling with capital inflows that threaten to destabilize their economies as interest rates near zero in developed nations lure investors seeking higher returns. Bangko Sentral last week said it is considering expanding reserve requirements on banks’ trust products, as the peso’s rise to a five-year high this month hurts exporters and erodes the value of remittances.

“Coping with the excessive inflows remains the key challenge, with the strengthening peso threatening the competitiveness of several industries,” Eugene Leow, an economist at DBS Group Holdings Ltd. in Singapore, said before the decision. “More administrative measures may be introduced to address these inflows in the near term. In the meantime, we expect BSP to maintain policy rates.”

The peso was little changed at 40.627 against the dollar as of 3:59 p.m. in Manila. The benchmark Philippine Stock Exchange Index gained 0.4 percent at the close.

Speculative Inflows

The Philippines’ $225 billion economy grew 7.1 percent in the third quarter, the fastest pace since 2010 and the most in Southeast Asia. A rising middle class is boosting spending on Ayala Land Inc.’s homes and Jollibee Food Corp.’s fried chicken meals, brightening the outlook for company profits and helping the benchmark stock exchange index surge to a record this month.

The monetary authority is focused on containing speculative inflows and has participated in the currency market to restrain the peso, Governor Amando Tetangco said last week. Bangko Sentral last month said it will impose limits on currency forward positions at banks at 20 percent of capital for local lenders and 100 percent for foreign entities.

The peso has gained more than 6 percent in the past 12 months, the best performer among Asia’s 11 most widely-traded currencies tracked by Bloomberg. “A clear and present concern is the impact of capital inflows,” Tetangco said earlier this month, adding that they “could also feed credit booms, asset- price bubbles and other financial imbalances.”

Eroding Competitiveness

Remittances to the Philippines, which account for about 10 percent of the economy, rose 7.6 percent in November, while portfolio inflows surged to a record $18.5 billion in 2012.

The currency’s gains are eroding competitiveness, the Business Processing Association of the Philippines said in a statement last month. Elsewhere in Asia, advances in the won prompted South Korea’s central bank to announce in November it would tighten limits on currency forward positions at banks, while a Commerce Ministry official in Thailand said yesterday they are worried that the baht’s strength will affect exports.

Philippine President Benigno Aquino is increasing spending to a record this year while seeking more than $16 billion of investments in roads and airports to spur growth to as much as 7 percent in 2013. Standard & Poor’s last month raised the country’s sovereign rating outlook to positive, bringing it closer to an investment grade-status.

The Philippines joins emerging-market peers including Indonesia, Thailand and Brazil in holding rates at the start of the year. Consumer prices rose 2.9 percent in December from a year earlier.

To contact the reporters on this story: Karl Lester M. Yap in Manila at; Max Estayo in Manila at

To contact the editor responsible for this story: Stephanie Phang in Singapore at

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