Philippines Pares Bank Lending Program, Holds Rate (Update2)
March 11, 2010, 5:30 AM EST(Adds economist’s comment in fifth paragraph.)
By Karl Lester M. Yap and Max Estayo
March 11 (Bloomberg) -- The Philippine central bank pared back a lending program for banks and said it will consider doing more to reduce cash in the economy, even as it kept interest rates at a record low.
“We will consider in the future unwinding the remaining liquidity measures,” Deputy Governor Diwa Guinigundo said. “Any excess liquidity may abet inflation in the future. It is an unnecessary risk.”
Asian nations from China to Malaysia have started withdrawing monetary stimulus as growth accelerates and inflation returns amid the global economic recovery. Still, the Philippine central bank said price gains in the country remains “manageable” and it doesn’t see a need for an “early tightening” of its key interest rate.
“You want to see sustained evidence of growth before starting to tighten,” said Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila. Reducing the lending program to banks is a more “ancillary policy” that takes out some liquidity without hurting private consumption, she said.
Exports Climb
Benchmark four-year bond yields dropped to a three-month low yesterday on optimism borrowing costs will remain low. The yield rose two basis points to 5.945 percent today, halting its longest winning streak since at least January 2009. The peso fell to 45.73 a dollar at the close after reaching an eight-week high as Asia’s rebound attracts funds to the region.
Philippine exports, which account for about a third of the nation’s $167 billion economy, rose at the fastest pace in more than 14 years in January. The government forecasts gross domestic product will expand 2.6 percent to 3.6 percent in 2010, as President Gloria Arroyo increases outlays on airports, bridges and state programs to a record 1.54 trillion pesos ($34 billion) this year to bolster growth.
Economic expansion 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.
Ample Liquidity
The central bank also cut the ratio by which it values the loans used by lenders as collateral to access the rediscounting facility, and will require banks to have lower levels of bad loans to qualify for the program, it said today.
“We don’t want to shock the market,” Guinigundo said. “But we want to signal there is more than ample liquidity in the system.”
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”.
At its last policy meeting in January, Bangko Sentral announced an increase in the interest rate that it charges lenders for borrowing money from the central bank through the rediscounting facility. The rediscounting window allows lenders to borrow using loans as collateral.
Act Decisively
“The Monetary Board will act decisively and adjust monetary policy settings accordingly if and when the second- round effects of supply shocks become evident,” the central bank said today. The El Nino weather phenomenon that’s hurting crops and power supply, possible demands for higher wages and rising global commodity prices could spur inflationary pressures, it said.
The bank lowered its inflation estimate for this year to 4.64 percent from 4.7 percent, and raised the forecast for 2011 to 3.45 percent from 3.27 percent. 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 the rediscounting facility in late 2008.
It’s “very premature” to consider raising banks’ reserve requirement, Guinigundo said today.
--With assistance from Clarissa Batino, Francisco Alcuaz Jr. and Cecilia Yap in Manila. Editors: Stephanie Phang, Cherian Thomas
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: Chris Anstey at canstey@bloomberg.net
