Govt to ensure policy rates ahead of inflation - Purisima

By Karen Lema and Erik dela Cruz, Reuters

Posted at Jul 27 2011 07:12 PM | Updated as of Jul 28 2011 03:12 AM

* Says peso strength, strong inflows to weigh on policy

* Says government to continue to cut foreign debt

MANILA, Philippines - The Philippines wants to ensure monetary policy is ahead of inflation and will consider the peso's recent strength and strong inflows in future policy actions, Finance Secretary Cesar Purisima said on Wednesday.

The outlook on oil prices, domestic liquidity conditions and developments in the global economy would weigh on the central bank's policy review on Thursday, he said.

"We want to be sure we are ahead of the curve in dealing with inflation," Purisima, who sits on the Monetary Board, said in the Dealing Room, a Reuters Messaging chat room.

"We, however, are vigilant to make sure that we monitor closely hot money flows," he said.

Analysts expect policymakers to keep the overnight borrowing rate steady at a two-year high of 4.5%, but raise banks' reserve requirement by 1 percentage point, the second such increase in as many meetings.

The Philippines, like other emerging markets, have seen rising inflows as funds move out of developed economies in search of higher yields and with the prospect of a U.S. debt default, pushing the peso to a three-year high on Wednesday and the stock market to new peaks last week.

Central bank officials have said the strength of the peso could dampen imported inflation.

Strong peso

"The Philippine peso is market determined and with what is happening in the U.S., our currency has appreciated," Purisima said. "As policymakers, we have to consider this development in determining future policy actions."

He said the dollar's weakness reflects "a possible loss of confidence by the financial market in the U.S. political processes," adding he expects a U.S. debt default would be averted.

He said the uncertainty was accelerating the search for alternative reserve currencies.

Purisima said the Philippines would continue to reduce its reliance on foreign debt from the current level of 30 percent of its total debt. The country was the first in Asia to issue global bonds denominated in the local currency last year.

"We hope to bring it down further over the next few years. The success of the global peso note will give us more options in achieving this goal," he said.

Purisima also said the Southeast Asian country was working to achieve an investment-grade rating soonest, which would help lower the government's borrowing costs and widen its potential investor base.

Fitch last month upgraded the country's credit rating to within one notch of investment grade, putting it on par with Indonesia, on its improving fiscal position and budget management, favourable economic prospects and strengthening external finances.

"The BSP (Bangko Sentral ng Pilipinas) has done several studies which shows that we are at least one, and maybe even two notches underrated. The market allows us to borrow at close to investment grade," Purisima said.