Philippine price pressures easing: central bank governor

BASEL: The Philippine central bank governor said on Saturday that domestic price pressures were moderating and the recent fall in oil prices following the release of emergency stockpiles was positive from an inflation standpoint.

Brent oil fell more than 7 percent last week, its biggest drop in seven weeks, after industrialised nations unexpectedly agreed to release oil from the emergency stockpiles of the International Energy Agency (IEA) for only the third time ever.

In the Philippines, average inflation is expected to be at the high end of the 3-5 percent target this year, and below 4 percent in 2012. This has allowed the central bank to leave interest rates on hold this month, although it raised reserve requirements.

"What we see is there's been some moderation in price increases although prices remain elevated," governor Amando Tetangco told Reuters on the sidelines of a meeting of the Bank for International Settlements in Basel, Switzerland.

"The action of IEA shows members can take collective action. What we want to see is lower oil prices. Clearly (the recent oil fall) is a positive from the inflation point of view. But we have to see if this will persist."

He said a high level of liquidity stemming from capital inflows was one of the key challenges for domestic monetary policy.

"Some people have characterised the policy action as a pause but actually we increased reserve requirements and the main motivation behind it is to keep a lid on liquidity that is coming from capital inflows," Tetangco said.

"Capital inflows have, just in other countries, complicated the conduct of monetary policy. To be able to enhance the effectiveness of policy rate moves, liquidity has to remain under control."

The central bank left interest rates on hold at 4.5 percent after raising them in its past two meetings. The bank raised banks' regular reserve requirements by one percentage point on June 16, taking total reserve requirements to 20 percent from June 24.

Broader global economic dynamics -- a two-speed recovery -- have also played a part in higher liquidity in the Philippines.

"You have a slow recovery in advanced economies and robust growth in emerging markets. That serves to attract capital into emerging markets. Interest rate differentials continue to be in favour of emerging markets," Tetangco said.

"One can expect this to continue given inflation is an important risk for emerging markets in general including the Philippines. You can expect monetary tightening there."

GROWTH OUTLOOK

Tetangco said the Philippine economy was likely to grow 5-6 percent this year, contrary to the government's forecast of 7-8 percent which he said was more "aspirational".

He said a Chinese economic slowdown would impact the Philippine economy but that a hard landing was unlikely.

"They have been able to manage growth. It's more manageable economic growth. We don't see that kind of scenario," he said.

Copyright Reuters, 2011