Bloomberg News

Philippines Holds Rate to Protect Economy From Growth Risks

November 02, 2011

(Updates with comment from economist in third paragraph.)

Oct. 20 (Bloomberg) -- The Philippines kept its benchmark interest rate unchanged for a fourth meeting, joining nations from Indonesia to South Korea in choosing to protect growth as a weakening global economy reduces the urgency to fight inflation.

Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at 4.5 percent, according to a statement in Manila today. The decision was predicted by all 17 economists in a Bloomberg News survey. The central bank maintained the reserve requirement ratio for lenders at 21 percent after ordering an increase in July that took effect the next month.

“The central bank’s bias will likely move towards growth,” said Prakriti Sofat, a Singapore-based economist at Barclays Capital. Bangko Sentral “will likely remain on pause mode, while keeping a close eye on external developments and growth dynamics as well as the inflation trajectory,” she said.

Asian policy makers have shifted their focus to shielding their economies as a potential Greek default and unemployment above 9 percent in the U.S. threaten to push the world into another recession. Philippine President Benigno Aquino unveiled a 72 billion-peso ($1.7 billion) stimulus plan last week while Thailand kept rates unchanged for the first time this year yesterday, ending its longest series of increases since 2006.

“A neutral stance seems to be the best approach for now,” Arthur Michael de Castro, an analyst at Bank of the Philippine Islands in Manila, said before the decision. “You don’t want to jump the gun by cutting too early while a rate hike will choke an already weakening economy.”

Currencies Fall

The peso, which had its worst monthly loss since May 2010 in September, has risen about 1 percent this month. Yields on benchmark five-year bonds due September 2016 fell to a five-week low this week, according to Tradition Financial Services. The Philippine Stock Exchange Index is down 0.7 percent this year.

Asian currencies weakened today as a lack of progress in resolving Europe’s debt crisis added to concern the global economic growth is slowing, prompting investors to cut holdings of emerging-market assets. The won slipped from a one-month high after a rift emerged between France and Germany over how to enhance a bailout fund.

“There could be further deterioration in the global financial markets,” Philippine central bank Deputy Governor Diwa Guinigundo said in Manila today. “The challenge is to be watchful of emerging risks and be prepared to respond accordingly.”

Brazil, Singapore

The risk of another global recession erased $10 trillion off equities worldwide last quarter and prompted officials from China to Brazil to boost fiscal measures or cut interest rates. Singapore, which uses the island’s dollar to manage prices, said this month it will slow currency gains as the government cut its growth forecast for 2011.

Brazil’s central bank cut borrowing costs by half a point this week for a second straight meeting as growth in Latin America’s biggest economy slows amid Europe’s sovereign-debt crisis.

Growth in the Philippines’ $200 billion economy eased for a fourth straight quarter in the three months through June, with gross domestic product rising 3.4 percent from a year earlier. Slowing expansion prompted Aquino to pledge he will accelerate spending on roads, bridges, and railways to support the economy as the government cut its growth forecasts for this year and next.

Slowing growth is being felt by the country’s companies. Philippine Long Distance Telephone Co.’s third-quarter revenue was likely lower from a year earlier, Chairman Manuel Pangilinan said this month.

Inflation Pressure

Inflation accelerated in September, with consumer prices increasing 4.8 percent from a year earlier, according to data from the National Statistics Office using 2006 as a base year. The gain was 4.6 percent using 2000 as a base year. The central bank targets an average annual inflation rate of 3 percent to 5 percent from 2011 to 2013, using the 2000 series.

The Philippines will meet its inflation target this year until 2013, central bank Governor Amando Tetangco said today. Price gains will likely average 4.46 percent this year, 3.05 percent in 2012 and 3 percent in 2013, Guinigundo said. Monthly inflation this year won’t exceed 5 percent, the deputy governor said.

“The Monetary Board continues to be mindful of any remaining upside risks to inflation, including potential increases in liquidity due to sustained capital inflows,” Tetangco said.

Still, inflation has been “relatively subdued” and won’t impinge on consumption, Guinigundo said. Banks have sufficient funds for lending, while domestic consumption and the government’s fiscal stimulus plan will likely boost economic growth in the fourth quarter, he said.

--With assistance from Michael Munoz in Hong Kong, Cecilia Yap and Clarissa Batino in Manila. Editors: Stephanie Phang, Shamim Adam.

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Max Estayo in Manila at mestayo@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net


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