Bloomberg News

Inflation Risks Continue to Challenge Philippines, Tetangco Says

June 19, 2011

June 20 (Bloomberg) -- The Philippines continues to face risks from inflation and the central bank is closely monitoring inflows and liquidity levels, Governor Amando Tetangco said.

“There are still risks that can affect inflation, but right now we would like to first assess the impact of the measures we have adopted,” Tetangco told reporters in Laguna province, south of Manila, yesterday. This year’s inflation target of 3 percent to 5 percent is “still at risk,” prompting policy makers to raise banks’ reserve requirement ratio this month, he said.

On June 16, Bangko Sentral ng Pilipinas ordered lenders to set aside more money as reserves while keeping its overnight rate unchanged at 4.5 percent after raising the benchmark by a combined half a percentage point in its two previous meetings. Higher food and oil prices have prompted policy makers in Asia to increase borrowing costs and their currencies to gain to combat inflation even amid prospects of slowing global growth.

The central bank’s recent actions are “part of the normalization of monetary policy,” Tetangco said. “The question is, whether there is going to be a need for further action moving forward.”

Bangko Sentral cut banks’ reserve requirement ratio by 2 percentage points to 19 percent in November 2008 and a month later started cutting the benchmark rate to help spur growth amid a global slowdown. That easing cycle reduced the overnight rate by a total of 200 basis points.

The reserve ratio will rise to 20 percent starting June 24, the central bank said.

‘Data Dependent’

“Any further rate increase will be data dependent,” said Jonathan Ravelas, chief strategist at Banco de Oro Unibank Inc. in Manila, the nation’s largest lender. “Raising the reserve ratio has an immediate effect of siphoning liquidity,” said Ravelas, who predicts another quarter-point increase in the third quarter.

Bangko Sentral is monitoring oil and food prices and will “keep an eye on liquidity.” A easing of monetary policy in the U.S. may boost inflows to emerging markets such as the Philippines, he said.

Money-supply rose 7.3 percent in April from a year earlier, the slowest pace in more than two years. That reflected the drop in public-sector spending during the period, Tetangco said. The government will “jack up” spending in the second half, Budget Secretary Butch Abad said on June 18.

“The plan of the government is to increase spending, so we’ll see how that’s going to affect liquidity,” Tetangco said. “The U.S. may decide to keep easy monetary policy longer, in which case that may lead to an increase in inflow of capital to the emerging markets. We need to watch that also.”

Consumer prices in the Philippines climbed 4.5 percent last month from a year earlier, the biggest increase since April 2010. The $161 billion Asian economy expanded 4.9 percent last quarter, the smallest gain since 2009.

The latest central bank forecasts indicate a lower inflation path and that expectations have shown some signs of leveling off, the central bank said on June 16.

--With assistance from Clarissa Batino in Manila. Editors: Paul Tighe, Richard Dobson

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To contact the reporters on this story: Cecilia Yap in Manila at cyap19@bloomberg.net; Clarissa Batino in Manila at cbatino@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net


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