BSP says may adjust policy if strong inflows continue

ABS-CBN News

Posted at Jul 26 2011 02:24 PM | Updated as of Jul 27 2011 11:17 PM

MANILA, Philippines (UPDATE) - The central bank may adjust its monetary policy if the global economy's multispeed recovery continues to fuel strong inflows to emerging markets and pose risks to domestic liquidity and inflation, Deputy Governor Diwa Guinigundo said on Tuesday.

The Bangko Sentral ng Pilipinas (BSP) meets to review policy on Thursday and it would study options including a further rise in banks' required reserves and a policy rate increase to dampen rising liquidity, Guinigundo told reporters.

A percentage point increase in bank reserves will take them back to pre-global crisis levels while a 25 basis point rise in the overnight borrowing rate will bring it to 4.75%, the highest since March 2009.

"If the multispeed recovery will continue, then we will have to adjust monetary policy according to the developments in terms of liquidity," Guinigundo told reporters.

The BSP kept its interest rates steady during its June policy review on signs of moderation in inflation pressures.

But it raised banks' reserve requirement by one percentage point to counter liquidity pressures, which could be fueled by inflows amid the strong economy.

Headline inflation in May was 4.5%, well below market forecasts but higher than a downwardly revised 4.3% in April. Core inflation edged up to 3.7%, the highest since September 2010.

Liberalizing FX rules

Policymakers have said the Philippines may see more foreign capital pouring into its markets as cheap cash and sluggish growth in major economies keep investors shifting funds to emerging markets in search for better returns.

The Philippine stock market's main index hit record highs last week on higher volumes, with net foreign buying in the week of July 22 at P2.7 billion, more than double from the previous week.

That brought net foreign purchases in the year to July 22 at P23.6 billion, equivalent to about two-thirds of net foreign purchases in the whole of 2010.

In the first half of the year, the Philippines had net portfolio inflows of $2.36 billion, more than two-fold increase from a year earlier.

To cope with strong capital inflows, Guinigundo said the central bank was also looking at further liberalizing foreign exchange rules, a move that will make it easier for funds to leave the country and dampen a peso currency that has reached three-year highs. - With Reuters