Bloomberg News

Philippines May Raise Inflation Outlook, Signaling Rates on Hold

September 07, 2012

Philippine central bank Deputy Governor Diwa Guinigundo said policy makers will probably raise inflation forecasts for 2012 and 2013, signaling the bank may pause after three interest-rate cuts this year.

“Monetary policy remains appropriate at this time,” Guinigundo said in an interview in his office in Manila yesterday. “You now face significant issues with respect to commodity price increases. On the geopolitical side, there was renewed tension in the Middle East, driving concern on possible tightening of supplies.”

The European Central Bank approved unlimited debt purchases on Sept. 6 to resolve the region’s crisis and prevent a break-up of the euro, a move that may ease pressure on global policy makers to keep reducing interest rates. Bangko Sentral ng Pilipinas cut its benchmark rate a third time this year to a record low of 3.75 percent in July, joining policy makers from South Korea to China in shielding domestic economies.

“We have expected inflation to pick up in the Philippines as domestic demand has remained quite high,” said Trinh Nguyen, a Hong Kong-based economist at HSBC Holdings Plc. “It’s important to be vigilant. The central bank will wait to see how prices play out and interest rates will remain on hold for the rest of the year.”

The peso climbed to a seven-week high yesterday, rising 0.5 percent to 41.67 per dollar, according to Tullett Prebon Plc. It has gained more than 5 percent this year, the best performer among Asia’s 11-most traded currencies.

Investment Pledges

President Benigno Aquino is seeking to boost growth to as much as 7 percent in 2013. He has increased spending, awarded infrastructure contracts, and won investment pledges from Glencore International Plc, the world’s biggest publicly traded commodities supplier, and Gazasia Ltd., a London-based alternative fuel company, this year.

“Monetary policy has ensured positive credit conditions and sufficient liquidity to sustain economic activity,” Guinigundo said. “The policy rate remains well-calibrated to provide adequate insurance against continued softness of global economic activity.”

Asian policy makers are weighing more stimulus against the need to guard against inflation, with economists in a Bloomberg News survey predicting South Korea will cut its benchmark rate next week. Indonesia and the Philippines will probably hold its key rate at a record-low on Sept. 13, according to separate surveys. Thailand and Malaysia kept borrowing costs unchanged this week.

Less Insurance

The economy will probably expand close to 6 percent this year, the deputy governor said. Growth may moderate in the third quarter, the result of monsoon rains that flooded the capital and hurt agriculture, before recovering in the fourth quarter, he said.

“Benign” inflation makes it “very difficult” for borrowing costs to be increased, Guinigundo said.

“If you increase interest rates, you will be reducing your insurance against possible tail risk events in Europe and in the U.S.,” he said. “While you may have higher than trend actual growth performance, you do not want to preempt an untimely reduction or moderation in economic activity in the presence of all these global risks.”

Inflation accelerated to a seven-month high in August, with consumer prices rising 3.8 percent from a year earlier. Price gains will meet the central bank’s target of 3 percent to 5 percent this year and next, Guinigundo said.

Bangko Sentral forecast in July that inflation will average 3.1 percent this year, and 3.2 percent in 2013. Growth in remittances from Filipinos abroad will meet the central bank’s forecast of 5 percent in 2012, Guinigundo said.

The $225 billion economy expanded 5.9 percent last quarter, exceeding the 5.5 percent median estimate of economists. Growth last year was 3.9 percent and it was 7.6 percent in 2010.

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Clarissa Batino at cbatino@bloomberg.net

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


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