Philippines May Hold Interest Rate on Slow Inflation

By Karl Lester M. Yap

Oct. 1 (Bloomberg) -- The Philippine central bank will likely keep borrowing costs unchanged this week as the nation’s strengthening economy hasn’t yet reignited inflation risks.

Bangko Sentral ng Pilipinas will hold its benchmark interest rate steady at a record low of 4 percent for a second straight meeting today, according to all 15 economists surveyed by Bloomberg News. The decision is due about 4 p.m. in Manila.

“Bangko Sentral, like many other central banks across the regions, will likely remain patient in the face of benign inflation,” said David Cohen, director of Asian forecasting at Action Economics in Singapore. Policy makers will “hold interest rates steady though the end of this year and probably through the first half of next year.”

Asian policy makers have stopped cutting borrowing costs as the global slump eases and nations including Singapore and New Zealand emerge from recessions. The risk that last week’s deadly Tropical Storm Ketsana will hurt Philippine economic growth may add pressure for the central bank to keep interest rates low.

“During any emergency like in this case, where you have a natural disaster, you loosen monetary policy and provide fiscal support to the economy,” said Luz Lorenzo, an economist at ATR- Kim Eng Securities Inc. in Manila. “It gives the central bank more reason not to raise interest rates too quickly.”

Manila Flooded

The Philippines’ monetary policy is appropriate as “both the upside and downside risks to inflation are even,” giving the central bank room to support economic growth, Deputy Governor Diwa Guinigundo said this week.

Ketsana, which killed more than 200 people in the Philippines after it swept across the island of Luzon on Sept. 26 and flooded more than a quarter of Manila, may slow this year’s growth to a range of 0.7 percent to 1.7 percent, compared with the government’s targeted 0.8 percent-to-1.8 percent expansion, Economic Planning Secretary Augusto Santos said Sept. 29. The official target remains for now, he said.

Governor Amando Tetangco in August ended the Philippines’ longest series of interest-rate cuts since at least 2002 after economic growth accelerated. The Philippine economy expanded 1.5 percent in the second quarter from a year earlier, quickening from a decade-low 0.6 percent in the previous three months.

Easing inflation allowed the central bank to cut its key interest rate by 2 percentage points from mid-December to July to bolster the domestic economy as exports collapsed. Consumer- price gains slowed to 0.1 percent in August.

Fragile Recovery

The central bank’s “infusion of liquidity has contributed to sustained economic activity in the Philippines and the avoidance of an economic recession,” Guinigundo said in a Sept. 28 interview. “The global recovery will be gradual and is still fragile,” and policy makers around the world will be very careful not to withdraw fiscal and monetary stimuli too early and risk a W-shaped recovery, he said.

The peso advanced 0.4 percent to 47.165 per dollar as of 9:03 a.m. in Manila today, according to Tullett Prebon Plc, after gaining 1.6 percent last quarter.

Indonesia’s central bank last month refrained from cutting its benchmark interest rate for the first time since November, judging that faster inflation is now a bigger risk than slowing growth. Malaysia’s central bank kept borrowing costs unchanged at 2 percent for a fourth straight meeting in August.

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net