Tetangco Sees Policy Rate on Hold Through 2014: Southeast Asia

The Philippine central bank sees inflation staying “well within” the target range this year and next, enabling it to keep interest rates unchanged through 2014, Governor Amando Tetangco said.

“At this point in time, I don’t see any signs that will lead us to modify or change the policy rate,” Tetangco, 60, said in an hour-long interview in his office in Manila yesterday. “That’s based on our inflation forecast. But as I said, things are continuously evolving.”

The peso, which has weakened about 5 percent this year, is “not out of line” with its regional peers, with 42 to 44 per U.S. dollar a “good range” for the currency, Tetangco said, before it closed at 43.325 yesterday. He also said trade with the 10-member Association of Southeast Asian Nations would offset the impact of a slowing economy in China, unless there is a sudden, sharp decline in growth on the mainland.

Bangko Sentral ng Pilipinas has helped shield the fastest growth rate in Asia this year, keeping its benchmark interest rate at a record-low 3.5 percent since October, even as a weakening peso poses inflationary risks. At stake for the Philippines is maintaining an economic resurgence as it seeks further credit rating upgrades.

The central bank last week raised its price-gain forecasts for this year and next, even as it predicted inflation will remain within its 3 percent-to-5 percent target range. Annual inflation quickened in June from May, with prices rising 2.8 percent from a year earlier.

“We’re not wedded to any particular monetary stance,” Tetangco said.

On Hold

“Despite very strong growth, there is little sign that inflation is about to take off,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. “I think we might see the BSP remain on hold for quite a long time. A rate increase may only come in late 2014.”

The peso is the worst performer in Asia this year after the yen and the Indian rupee among 11 currencies tracked by Bloomberg. It fell 0.2 percent today to 43.388 per dollar at 9:15 a.m. in Manila, according to Tullett Prebon Plc.

“We are moving with the regional currencies,” Tetangco said. “We are not out of line. Last year, we were one of the best performers.”

The weakened currency will help exporters and raise the value of remittances from the more than 9 million Filipinos working abroad. Jollibee Foods Corp., the largest Philippine fast-food operator, expects the decline in the currency to boost revenues from its network of international stores, Vice President Dennis Flores said in a July 3 interview.

The Philippine benchmark stock index has risen more than 15 percent this year. It rose to a record on May 15.

Slowing China

With China’s economy slowing for a second straight quarter and the International Monetary Fund this month cutting its global growth forecasts, policy makers in the region are facing pressure to aid expansion while balancing the need to stabilize financial markets. India raised two rates to support its currency, while South Korea has pledged to increase state spending.

Philippine growth is driven largely by domestic demand and investment, and so the country is less exposed to “unfavorable external developments,” said Tetangco, an economics graduate from the Ateneo de Manila University, who also holds a master’s degree in public policy and administration from the University of Wisconsin-Madison.

Even if Chinese growth slowed to 6 percent from a 7.5 percent expansion in the second quarter from a year earlier, that would not have a significant impact on the Philippine economy, Tetangco said. Trade with Asean would “offset any reduction with China,” he said.

Fastest Expansion

China was the Philippines’s third-biggest export market in 2012, with shipments totaling $6.16 billion.

“If there’s a slowdown and it is not a hard landing, the impact on Philippines will not be significant,” Tetangco said. “It depends how fast that happens. There’s that risk.”

Gross domestic product in the Philippines increased 7.8 percent in the first quarter from a year earlier, the fastest expansion among 17 Asia-Pacific economies tracked by Bloomberg. Still, unemployment rose to 7.5 percent in the three months through April, the highest level in three years.

The Philippines draws the least amount of foreign direct investment among its Southeast Asian peers, World Bank data show. The nation received $2.8 billion of FDI in 2012, compared with $8.6 billion for Thailand, according to the bank.

President Benigno Aquino, who won control of Congress in May elections, has pledged to accelerate reforms needed to ensure the nation’s economic revival is sustained. He asked lawmakers last week to improve governance and amend laws on tax breaks for investors in a bid to boost business competitiveness.

IMF Adviser

Aquino is increasing spending to a record in 2013 and seeking more than $17 billion of investments in highways and airports.

“Infrastructure is one area where we clearly need improvement,” said Tetangco, who was first appointed by President Gloria Arroyo in July 2005 and then re-appointed by Aquino for a second six-year term that began in July 2011.

Tetangco began working at the central bank in 1974 and later was appointed as one of three deputy governors. He served as alternate executive director of the International Monetary Fund in Washington, D.C. from 1992 to 1994, according to his central bank resume.

Investment-Grade Scores

He said it was “hard to say” whether the bank would change the rate on special deposit accounts. Tetangco has cut the rate three times this year and taken other measures to limit investor access to the facility.

The Philippines won its first investment-grade scores from Fitch Ratings and Standard & Poor’s earlier this year. Moody’s Investors Service, which ranks the nation a step below, last week said it is reviewing the rating for an upgrade. The Philippines may win more upgrades from Fitch and S&P before Aquino steps down in 2016, Tetangco said.

“It’s possible, because what they’ve been saying is that we have to demonstrate sustainability of the economic growth,” he said. “We’re in the position to do exactly that.”

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