Published — Friday 14 December 2012
Last update 13 December 2012 11:28 pm
MANILA: The Philippine central bank kept its benchmark interest rate unchanged at a record low, saying the economy needed less support with strong domestic demand seen extending into next year, but it saw risks from strong capital inflows.
The rate decision was in line with a Reuters poll in which 12 of 13 economists had predicted the Bangko Sentral ng Pilipinas would keep the overnight borrowing rate at 3.5 percent.
“The Monetary Board’s decision is based on its assessment that current monetary settings remain appropriate, as the cumulative 100-basis-point reduction in policy rates (earlier) in 2012 continues to work its way through the economy,” Governor Amando Tetangco told a media briefing.
The Philippines’ economy, like many of its Southeast Asian neighbors, has remained largely resilient in the face of the global slowdown as strong domestic demand and government spending largely offset the impact of weaker exports.
Highlighting its view that price pressures will remain moderate despite robust economic growth, the central bank trimmed its forecast for average inflation in 2012 to 3.2 percent from 3.3 percent. It also lowered its 2013 inflation forecast to 3.1 percent from 3.9 percent and its 2014 forecast to 2.9 percent from 3.1 percent.
It set an inflation target of 2-4 percent for 2015-2016.
Economists have contrasting views on where interest rates are headed in the later part of 2013, with some not ruling out further cuts if the global economic outlook deteriorates, and others predicting as much as 50 basis points in hikes to guard against demand-pull inflationary pressures.
Some analysts are concerned the central bank could be underestimating price pressures.
“The marked downward revision in next year’s inflation estimates might be downplaying risks, in light of firm domestic demand, commodity price shocks and utility price adjustments,” said Radhika Rao, economist at Forecast PTE in Singapore.
Philippine gross domestic product (GDP) expanded by a faster-than-expected 7.1 percent in the third quarter from a year earlier, making it likely it will surpass the official 5 percent to 6 percent growth target for the full year.
Despite strong domestic consumption, inflation has remained under control so far, helped in part by a strong peso. The average annual inflation rate in the 11 months to November was near the bottom of the central bank’s 3 percent to 5 percent target band for the year.
That has allowed the central bank to cut interest rates by a total of 100 basis points this year to boost domestic demand to make up for the weakness in exports as global demand sputters.
The peso has risen about 7 percent against the US dollar this year to become Asia’s second-best performing currency as foreign investors attracted by its growth story snap up Philippine assets such as stocks and bonds.
Strong capital flows have fueled a 33 percent jump in the benchmark share index this year, but are a worry for policymakers given their potentially destabilizing impact.
“We see the threat of capital flows,” Diwa Guinigundo, deputy governor of the Bangko Sentral ng Pilipinas told reporters, adding that non-monetary tools, like macroprudential measures, may be more effective in managing such risks rather than monetary policy.
The country is targeting faster growth of 6 percent to 7 percent in 2013, banking on further increases in domestic consumption and higher government spending.
The central bank said it expects imports to grow by 12 percent next year against 7 percent this year, supporting domestic expansion, which would cut the country’s balance of payments surplus.
The government has set aside a record of more than 400 billion pesos ($ 9.8 billion) for infrastructure projects and capital outlays under next year’s 2.01 trillion pesos budget.