Philippines May Keep Rate at 4%, Unwind Some Stimulus (Update1)
March 09, 2010, 9:37 PM EST(Adds exports in sixth paragraph.)
By Karl Lester M. Yap and Michael Munoz
March 10 (Bloomberg) -- The Philippine central bank will probably keep borrowing costs at a record low to support the economy’s recovery even as it prepares to pull back more stimulus measures.
“The central bank cannot raise interest rates because recovery is still nascent and needs to be nurtured,” said Marcelo Ayes, a senior vice president at Rizal Commercial Banking Corp. in Manila. “But they have to show they are on top of inflation and may decide to cut the rediscounting budget.”
Asian nations from China to Malaysia have started withdrawing monetary stimulus as growth accelerates and inflation returns. Bangko Sentral raised the interest rate for the rediscounting facility earlier this year, and Guinigundo said today the unwinding of liquidity measures is “always on the table” and will happen in “a matter of time.”
Benchmark four-year bond yields dropped to a three-month low today on optimism borrowing costs will remain low. The Philippine peso rose to an eight-week high as Asia’s rebound attracts funds to the region’s assets.
Growth Recovers
Exports, which account for about a third of the Philippines’ $167 billion economy, rose at the fastest pace in more than 14 years in January, buoyed by demand for electronics goods, a report showed today.
Philippine economic growth accelerated to a one-year high of 1.8 percent last quarter from a decade-low 0.4 percent in the previous three months, lifting prospects for the country’s property and food companies. Jollibee Foods Corp., the fast-food chain that outsells McDonald’s Corp. in the Philippines, is looking forward “to a more robust growth in 2010,” the company said last month.
The government forecasts the economy will expand 2.6 percent to 3.6 percent in 2010, as President Gloria Arroyo, whose term ends this June, increases outlays on airports, bridges and state programs to a record 1.54 trillion pesos ($34 billion) this year to bolster growth.
Policy makers will review all measures put in place to counter the global crisis now that financial markets have improved, Guinigundo said earlier this week. The rediscounting window allows lenders to borrow from the central bank using loans as collateral.
Cheap Money
“The rediscounting facility is unnecessary cheap money especially since financial markets have stabilized,” Ayes said.
Low interest rates in the U.S. and Europe and faster growth in Asia are spurring capital flows into the region, prompting China to start draining excess cash from the economy to prevent asset bubbles. Australia and Vietnam have raised borrowing costs as inflation accelerates, and Malaysia last week increased its overnight policy rate, saying it wants to avoid “financial imbalances”.
Bangko Sentral forecasts inflation may slow to a range of 3.4 percent to 3.5 percent in 2011 from an estimated 4 percent this year, Guinigundo said March 8. Consumer-price gains in the Philippines eased for a second month in February to 4.2 percent.
The Philippines’ benchmark interest rate is at the lowest level since central bank data started in 1990. Easing inflation last year allowed Bangko Sentral to slash the overnight borrowing rate by 2 percentage points from December 2008 to July 2009 to support economic growth as exports collapsed.
Policy makers also reduced the proportion of cash banks need to set aside as reserves and raised the amount of money available for loans to local lenders in late 2008.
--Editors: Stephanie Phang, Michael Heath
To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net
To contact the editor responsible for this story: Christopher Anstey at canstey@bloomberg.net
