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NEWS UPDATES Asean Affairs        17  February 2011

Philippine central bank behind on interest rates

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Hong Kong Shanghai Banking Corp. (HSBC) said the Philippine central bank has been left behind the curve in raising interest rates amid warranted inflation fears.

In a briefing, Frederic Neumann, HSBC co-head of Asian Economic Research, said raising interest rates at this moment will not hurt the Philippine economy but would provide a "firewall" against imported price movements.

HSBC expects a 25 basis points hike in the Bangko Sentral ng Pilipinas' (BSP) policy rates in May and at least 50 basis points for the whole of 2011.

"We would like to see interest rates to go up in March's meeting. But our call is for May, because the earlier the better, especially since the Philippines is now the stand out across the region not having increased interest yet, and to reassure markets it might be prudent to act earlier," Neumann told reporters.

The next meeting of the policy-making Monetary Board is March 24.

Neumann argued that the BSP can easily increase interest rates without significantly hurting the economy, since the current interest rates are 200 basis points below the estimate neutral level. The economist said the Philippines is at risk of food price inflation and second-round effects since the bulk of its Consumer Price Index or 46.6 percent is allotted to food, the highest in Asia after Sri Lanka.

The Philippines' external payments position will remain on a firm footing, which will be buoyed by rising reserves and steady growth in equity flows, Neumann also said.

"That said the economy remains vulnerable to rising capital inflows and ensuing appreciation pressures on the peso. The former may fuel asset inflation, while the latter could hurt export competitiveness," he said.

These are strong enough reasons for the central bank to keep the policy rate unchanged until the second quarter, especially with inflation expected to stay within the BSP's target band. "It should be a broadly smooth ride for the country in the near term, given the wide range of support factors," Neumann said.

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