BSP says has tools to deal with liquidity

Reuters

Posted at Jul 13 2011 06:13 PM | Updated as of Jul 14 2011 02:13 AM

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) said it has several tools to deal with price and liquidity pressures, which have seen it tighten policy three times this year, even as analysts said the country was not threatened by rapidly rising asset prices at present.

The BSP raised its key policy rate in March and May, and at a review in June raised reserve requirements for banks as it expressed concern about a potential build-up in liquidity that would fuel inflation.

"We have a lot of policy tools in the toolkit. It may not necessarily be that we will increase the policy rate, it can be the reserve requirement, intensified macroprudential regulations," Deputy Governor Diwa Guinigundo told an economic forum on Wednesday

"The point is, as long as there are inflation pressures in the economy... you can expect monetary action from the BSP," he said.

Analysts and policymakers expect strong capital flows into the Philippines to continue due to country's strong growth, improving budget position and the general outperformance of emerging markets over developed economies.

Policymakers are concerned a huge influx of funds, particularly as the outlook for major economies seems to be dimming again, could complicate inflation management. The central bank says there are no asset price bubbles at present.

"It is important for the central bank to make sure that excess liquidity does not simply float around and infuse market with so much purchasing power because that is a recipe for economic disaster," Guinigundo said.

Nicholas Kwan, head of research for Eastern Hemisphere at Standard Chartered Bank, said the challenge for the government was to make good of use the funds and channel them to productive investments such as infrastructure.

"If these funds cannot go into the real sector in the long run, then it may go into something very short term which may create asset bubbles," Kwan said.

"We are not there yet, but if you look at other countries and other economies in the region, some are facing more imminent problems already. So this trend is not so much the flow of too much liquidity, but the issue of how quickly we can channel this into effective and productive areas."