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Low inflation regime to sustain economic recovery, says BSP

January 14, 2011 12:15am

The Philippines needs to maintain a low inflation regime to sustain its robust economic recovery, Bangko Sentral ng Pilipinas (BSP) Gov. Amando Tetangco Jr. said Thursday.

"Strong [economic] growth in an environment of low and stable inflation [was] what we experienced last year. That was the ideal combination," he said.

With the country's better-than-expected economic performance, "there is [a] basis for us to set our sights to [a] sustained rapid growth," Tetangco said.

The Philippine economy grew 7.3 percent in the first quarter, 7.9 percent in second quarter, and 6.5 percent in the third quarter.

From January to September, economic growth averaged 7.2 percent or above the full-year 2010 target of 5-6 percent set by the interagency Development Budget Coordination Committee.

On the other hand, last year's inflation averaged 3.8 percent, well within the central bank's target of 3.5-5.5 percent.

This year, inflation will likely average 3.6 percent or within the BSP target of 3-5 percent, Tetangco said.

"This favorable inflation outlook gives BSP enough elbow room in its conduct of monetary policy," he said.

According to Tetangco, the favorable inflation outlook would support consumption and investment by fostering greater predictability in economic decisions.

He added that there is no major threat to global inflation at this time despite the uneven economic growth among advanced economies and emerging market economies.

Tetangco pointed out that Monetary Board has kept its policy rates at record lows for 13 consecutive policy-setting meetings due to the benign inflation outlook.

"The manageable inflation outlook has accorded the central bank room to keep our policy interest rates steady since July 2009," he said.

The Monetary Board has placed the overnight borrowing and lending rates at 4 and 6 percent, respectively, since July 2009.

Tetangco underscored that developing economies like the Philippines "should be mindful of [the] changes in the monetary policies of advanced economies."

No complication

The central bank would make sure that the surge of capital inflows to emerging markets would be orderly so as not to complicate monetary policy and create strong currency-appreciation pressures, Tetangco said.

"Foreign exchange is likely going to continue to flow into economies that have better growth prospects. If investor risk appetite continues to improve, then emerging markets, including the Philippines, will likely continue to be recipients of foreign exchange," he explained.

The central bank has been successful in taming the ill effects of the surge in capital flows on domestic liquidity, exchange-rate volatility, and inflation expectations, Tetangco said.

"The BSP achieved this by employing a mix of policy instruments, instead of simply depending on the policy interest rate alone," he said.

In addition, the risk of a bubble over the near term appears limited for a number of reasons, including the "conservative prudential framework we adopted in the aftermath of the Asian financial crisis," Tetangco said. — JE/OMG, GMANews.TV
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