Central bank: Reserve build-up 'appropriate'


Posted at Oct 11 2010 12:46 PM | Updated as of Oct 12 2010 08:40 AM

MANILA, Philippines - The central bank believes keeping a market-determined foreign exchange rate and a build-up in foreign reserves are appropriate responses to a strengthening peso currency, the central bank governor said.

World financial leaders and central bankers tried to defuse currency tensions during the IMF/World Bank semi-annual meeting at the weekend by calling for more monetary policy coordination globally to avoid foreign exchange volatility, but no concrete plans were laid out for dealing with uneven global growth.

"The strength of the regional currencies is due to a mix of factors, which are really intertwined - an increase in risk appetite partly due to the expectation that Asian economic growth will remain strong, and weakness of the US dollar due to its own fundamental growth and fiscal considerations, among others," central bank Governor Amando Tetangco said in an email to Reuters at the weekend.

"In the case of the Philippines, we add the further dimension of strong remittances and BPO (business process outsourcing) receipts," he said.

"Given this multi-dimension, a pragmatic approach comprising a policy mix of maintaining a market-determined FX rate and reserve build up, among others, is what's appropriate."

The Philippine peso has been appreciating along with most regional currencies, boosted by huge foreign funds seeking higher returns in emerging markets, with the peso last week hitting its strongest since May 2008.

Regional central banks have resorted to buying dollars to manage the rapid appreciation of their currencies, with the Philippine central bank's foreign reserves rising 7% to a record $53.542 billion in September from August.

Traders estimate the Philippine central bank has bought $3.1 billion in the market since Sept. 27.

"Indeed coordination among advanced and emerging markets economies is central, and a critical assessment of burden sharing with respect to the cost of adjustment between advanced and emerging markets economies should be made," Tetangco said.

He said there is concern that capital inflows "could come in faster and in larger amounts" as funds reallocate their portfolio to emerging markets and that one should carefully monitor how emerging markets respond to such flows.