Philippine Central Bank says has room to hold rates; eyes flows

A potential surge in capital inflows to emerging markets including the Philippines was a challenge because it could potentially complicate monetary policy, Tetangco said at an financial industry function on Tuesday evening.

Tetangco said policymakers were continuously reviewing the volume and structure of non-deliverable forwards (NDFs), including the possibility of imposing higher risk weightings on them to ensure they would not be used for speculation.

"After our series of policy moves that seem to be producing the desired results of tempering inflation, the BSP has room to keep interest rates steady," he said, reiterating comments after rates were kept steady at a review last week.

"We should also bear in mind capital inflows have continued and this would tend to increase domestic liquidity further, so you have to watch out for that, because if that is allowed to continue then we ran the risk of inflationary pressures down the road."

Tetangco said the central bank had sufficient tools to counter the impact of capital inflows, such as building up foreign reserves, allowing more flexibility in the exchange rate, and paying off foreign debt early.

The government was studying the central bank's suggestion it borrow locally to repay foreign debts early, and the central bank could sell it dollars for debt servicing, Tetangco said.

"The BSP remains committed to promoting polices that will reduce the country's external vulnerability and continue a market determined exchange rate with scope for occasional official action to maintain orderly market conditions," he said.

The central bank kept interest rates steady on Sept. 8 for a third successive meeting after raising them in March and May. The BSP had increased banks' reserve requirements at meetings in June and July to temper the rise in liquidity.

Copyright Reuters, 2011