Thursday, January 24, 2013

Philippines holds rate, capital inflows threat to inflation

    The central bank of the Philippines held its key policy rates steady, as expected, saying the risks to inflation appear balanced even if the strong inflow of capital threatens to push up inflation.
     Bangko Sentral ng Pilipinas (BSP), which cut its rates by 100 basis points in 2012, said it would leave is overnight borrowing, or reverse purchase facility rate, at 3.50 percent and the overnight lending, or repurchase rate, at 5.50 percent.
    "The Monetary Board's decision is based on the assessment that the inflation environment remains manageable," the BSP said in a statement following a board meeting. Last month the BSP also used the expression of "manageable" to describe inflationary risks.
    Inflation is forecast to track the lower half of the bank's 3-5 percent target range in 2013 and 2014.
    Economic growth in the Philippines is expected to continue to remain sold and "pending domestic power rate adjustments and the strong inflow of capital continues to pose upside risks to the inflation outlook," the bank said.
   Although global economic activity has stabilized, there is still uncertainty around fiscal consolidation and lingering market stresses in advanced economies, which weighs on global growth prospects and thus eases any upward pressures on commodity prices.

    Economists had expected the BSP to hold rates steady but are looking ahead to rate rises this year as inflationary pressures rises. Strong growth prospects, helped by higher remittances by overseas Filipino workers, has attracted international capital and pushed up the peso against the U.S. dollar by almost 7 percent in 2012.

     A recent review of the Philippine economy by the International Monetary Fund pointed to potentially volatile capital flows that could push up the exchange rate, presenting risks to growth and asset prices, according to press reports.
     The Philippine's Gross Domestic Product in the third quarter rose by 1.3 percent from the second quarter for annual growth of 7.1 percent, up from 6 percent in the second.

    Inflation in the Philippines in December ticked up to 2.9 percent from November's 2.8 percent.
    The BSP also set the interest rate on its Special Deposit Account (SDA) facility at 3.0 percent to fine-tune its policy tools, a move that it said was in line with international central banking practice.
    Previously, the SDA rate was priced at a premium, but the BSP said the operational refinement would help it ensure "that liquidity remains adequate to meet the requirements of the growing economy."



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