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Manila central bank keeps policy steady, warns of inflow risks

A woman counts peso bills at a currency exchange office in Manila September 26, 2012. REUTERS/Cheryl Ravelo
A woman counts peso bills at a currency exchange office in Manila September 26, 2012. REUTERS/Cheryl Ravelo

MANILA (Reuters) - The Philippine central bank kept its key policy rate steady at a record low for the second meeting in a row on Thursday, with economic growth expected to remain resilient, but it warned of risks posed by a surge in capital inflows.

The benchmark interest rate was left unchanged at a record low of 3.5 percent, in line with a Reuters poll in which all 13 economists had predicted the central bank would hold fire as the economy needed little monetary support.

But the monetary authority cut the interest rate it pays on its short-term special deposit accounts (SDA) after the facility consistently attracted a huge volume of funds which otherwise could have been used by banks for lending.

"Amid manageable liquidity growth and a benign inflation outlook, the operational refinement in the SDA facility will help enhance the ability of the BSP to ensure that liquidity remains adequate to meet the requirements of the growing economy," Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco told a media briefing.

He also said the central bank was ready to deploy additional macro-prudential measures to address any potential misalignment in asset prices.

Central bank Deputy Governor Diwa Guinigundo said authorities do not expect the cut in SDA rates to negatively affect markets.

"Government securities, foreign exchange as well as the bond markets will continue to be stable," he told reporters. "It's not going to be inflationary because there is no reason why holders of the SDA funds should withdraw their money."

The central bank trimmed its forecast for average inflation in 2013 to 3.0 percent from 3.1 percent but raised its 2014 forecast to 3.2 percent from 2.9 percent.

While maintaining that inflation risks appeared broadly balanced at the moment, it said strong capital inflows posed potential upside risks to its price outlook.

The Philippine economy, like most of its neighbors in Southeast Asia, has stayed resilient in the face of the European debt crisis and weak growth in key trading partners like the United States, with strong private and public spending offsetting weaker exports.

Economic Planning Secretary Arsenio Balisacan said on Tuesday the economy may have grown around 6.5 percent in 2012, with the momentum expected to be sustained this year, backed by infrastructure spending.

The estimate is higher than the government's 5 percent to 6 percent 2012 target. It will formally announce 2012 growth data on January 31.

INFLOWS A WORRY

On Wednesday, the International Monetary Fund said it had raised its 2013 economic growth forecast for the Philippines to 6 percent, and it expects the economy to grow at a robust pace of 5.5 percent in 2014.

Because of the positive growth outlook, most economists in a Reuters poll this week expected the central bank to keep interest rates steady until at least the second half of the year.

Strong capital inflows remain the central bank's biggest concern, officials said.

These inflows have been a two-edged sword, pushing the currency higher against the U.S. dollar and further undermining the attractiveness of the country's exports.

But central bank officials have said they have sufficient tools to deal with these flows to ensure price and financial market stability.

The surge of foreign funds into the Philippines has driven a more than 5 percent rise in the stock market index so far this year, making it Asia's second best performing bourse. It has also led the peso to appreciate close to 1 percent against the dollar, after it surged nearly 7 percent in 2012.

South Korean and Thai authorities also sounded the alarm this week over gains in their currencies.

"Given that growth momentum is strong and inflation is benign, the BSP has room to keep rates on hold. Inflows remain the biggest concern, as they spur risk of an asset bubble as well as elevate peso appreciation pressures," said Trinh Nguyen, an economist at HSBC in Hong Kong.

"But it's not a monetary problem. Therefore, we expect rates to stay on hold for most of the year, especially given that inflationary pressures are on the rise due to a China recovery and still-strong domestic demand."

(Reporting by Karen Lema and Erik dela Cruz; Editing by Kim Coghill)

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