Philippine Policy Decision a ‘Balancing Act,’ Guinigundo Says
May 12, 2010 May 13 (Bloomberg) -- The Philippine central bank said its next monetary policy decision will be a “tight balancing act” as policy makers decide whether it’s time to raise interest rates or ask lenders to set aside more deposits as reserves.
Bangko Sentral ng Pilipinas needs to be careful it doesn’t increase borrowing costs unnecessarily because it may erroneously “signal to the market” that rates will rise further, Deputy Governor Diwa Guinigundo said in an interview in Manila yesterday. Asking banks to put more money aside can increase business costs, he said.
“It will be a very tight balancing act to decide on whether we should already adjust the policy rate or recalibrate the reserve requirement,” Guinigundo said. “We may even choose not to touch both if we think the global and domestic economic recovery remains fragile and if the inflation outlook continues to be favorable.”
The comments underscore the central bank’s uncertainty about its next move as the Philippines elects a new government this week, in contrast to earlier this year, when officials including Guinigundo indicated which measures would be adjusted before policy decisions. Bangko Sentral has pared a lending program for banks this year while keeping the benchmark rate at a record-low 4 percent.
“The central bank is currently evaluating what policy decision will have the least effect on economic growth,” said Jonathan Ravelas, chief market strategist at Banco de Oro Unibank Inc. “Adjusting the reserve requirement or interest rates will have a more potent impact than the previous policy decisions. The bank will also have to take into the account the economic policies of the next administration.”
Aquino’s Priorities
Senator Benigno Aquino, who is leading vote tallies in this week’s presidential election, has said job creation and luring investments are among his top priorities.
Guinigundo, who will meet with other policy makers on June 3 to decide on borrowing costs, said inflation may average about 5 percent this year on higher transport fares, wage adjustments and rising commodity and oil prices. Price gains will still be within the central bank’s target, he said.
The bank will consider first-quarter economic growth as it frames monetary policy, he said.
“The move will be data driven,” Guinigundo said. “I’m not saying our policy stance is neutral” as the central bank recognizes that there is “ample liquidity in the system,” he added.
Asian Moves
Asian nations are seeking to avert asset bubbles and cool inflation without undermining the region’s economic recovery. India has raised interest rates twice this year, joining Malaysia and Australia in increasing borrowing costs, while Thailand, South Korea and Indonesia have remained on hold. Bank of Korea Governor Kim Choong Soo and his board left the seven- day repurchase rate at a record-low 2 percent yesterday.
The Philippine peso last month climbed to its strongest level since August 2008, reaching 44.158 per dollar, as Asia’s rebound attracts funds to the region’s assets. The benchmark stock index has risen more than 40 percent in the past year.
Philippine exports rose at the fastest pace in at least 29 years in March, a government report showed yesterday, as customers in the U.S. and China increase purchases of Asian goods from Philippine-made Texas Instruments Inc. semiconductors to South Korea-produced Hyundai Motor Co. cars.
“As long as the recovery takes hold more firmly and the upside risks to inflation prove to be more dominant, then we really have to continue or sustain our more cautious stance,” Guinigundo said.
Inflation Building
Inflation in the Philippines held at the fastest pace since December last month, with consumer prices rising 4.4 percent from a year earlier.
“Inflationary pressures are gradually building,” said Prakriti Sofat, a Singapore-based economist at Barclays Capital. “Rate normalization needs to begin, but I expect it to start in the early part of the third quarter.”
Policy makers cut the reserve requirement to 19 percent from 21 percent in November 2008. The central bank hasn’t raised its benchmark interest rate since August 2008.
Bangko Sentral began withdrawing monetary stimulus earlier this year by raising the rate that it charges lenders for borrowing money from the central bank and cutting the budget for the program.
- Published on Bloomberg News || Last Updated: May 12, 2010 12:00 EDT
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