MANILA (UPDATE) - The Philippine central bank said on Tuesday the scope for holding interest rates steady is narrowing, even as it forecast inflation will stay within its comfort range.
Annual inflation in the Philippine stayed above the mid-point of the central bank's 3-5 percent target for the third month in a row in February, and policymakers expect it to average 4.3 percent this year against 3.0 percent in 2013.
"Our forecast runs show that over the policy horizon, average annual inflation will settle within the government's target range. Therefore, there continues to be room to keep rates steady, although the room to keep stance of policy has narrowed," Governor Amando Tetangco said ahead of a policy meeting on March 27.
The Bangko Sentral ng Pilipinas has kept the overnight borrowing rate steady at a record low of 3.5 percent since December 2013, but analysts think rates may be on their way up this year to head off pressures from higher food and utility costs, the impact of strong economic growth and a weaker peso.
The consensus from a Reuters quarterly poll in January was for the central bank to start raising rates in the third quarter.
Tetangco, who was speaking at an investors' briefing, said the central bank will continue to maintain its presence in the foreign exchange market to deal with sharp swings even as he said the peso will continue to be supported by the country's strong external payments position.
"Given the moods and swings of the financial markets, we will continue our flexible exchange rate policy but at the same time keep a strategic presence in the foreign exchange market to limit excessive exchange rate volatilities," the governor said.
The peso has clawed back some its losses and is down just 0.5 percent against the dollar so far this year.
Despite damage wrought by a super typhoon that struck in November, the Philippine economy grew 7.2 percent for the whole of 2013, suggesting momentum will remain robust this year.
The government is targeting 6.5 to 7.5 percent growth in 2014, but Tetangco said the outlook is not without risks.
Uncertainties over the speed and duration of the U.S. Federal Reserve's tapering program could trigger capital outflows, while expectations of slow growth in Asia could also impact on intra-Asia trade, Tetangco said.
He added that the political turmoil in Ukraine may escalate and affect world commodity prices and global financial markets, undermining global growth prospects.