IMF: PH central bank may need to tighten policy further

Reuters

Posted at Jul 20 2011 04:42 PM | Updated as of Jul 21 2011 03:10 AM

* Says capital inflows to Philippines, emerging markets to continue

* Says abundant liquidity, strong growth makes case for policy hike

MANILA, Philippines (UPDATE) - The central bank may need to carry on tightening monetary policy, and has to carefully manage expected strong capital flows to avoid macroeconomic and asset price volatility, the International Monetary Fund (IMF) said on Wednesday.

The Bangko Sentral ng Pilipinas (BSP) has raised interest rates by a total of 50 basis points this year, and at a policy review in June raised banks' reserve requirements on concerns about a potential increase in liquidity.

"With abundant liquidity and the strong recovery, it may be necessary to continue normalizing the policy stance," the IMF said in a statement after a staff visit to the country.

"If a tail risk were to materialize, such as a global shock, there is scope to adjust the pace and timing of policy normalization," it said.

Analysts expect the central bank to raise banks' required reserves again at a policy review next week, and then increase rates further later in the year.

The IMF said the near-term outlook for the Philippines was favourable, "characterized by moderating but still rapid growth."

It said it expects growth of 5% this year and next, slower than a government target of 7% to 8% for both years and a 7.6% expansion in 2010.

It also expects inflation to remain within the government's target range of 3% to 5% this year and in 2011, and with the balance of payments staying in surplus.

"The fragile global economic environment remains a key risk to the outlook," the IMF statement said. "Strong capital inflows need to be carefully managed in order to avoid macroeconomic and asset price volatility."

The strength of emerging markets is expected to attract money as investors seek better returns against a backdrop of a weak global economy.

"The prospects here (in Asia) are very strong compared to prospects in other parts of the world, so that attracts capital inflows," Vivek Arora, IMF mission chief, told journalists.

The Fund said the Philippines needed to raise its tax effort to support fiscal consolidation and increase its spending on basic services.

The IMF said the budget deficit was expected to either be in line or smaller than a government target of P300 billion this year, or 3.2% of GDP, from P314 billion or 3.7% in 2010.