Financial thoughts

The Philippine central bank cut the amount of money available for loans to lenders through its so- called rediscounting facility to reduce cash in the economy, even as it kept interest rates at a record low.

Bangko Sentral ng Pilipinas reduced the budget for the facility to 40 billion pesos ($875 million) from 60 billion pesos, effective March 15, it said in a statement in Manila today. Policy makers kept the benchmark interest rate at 4 percent for a sixth straight meeting, as expected by all 15 economists surveyed by Bloomberg News.

Asian nations from China to Malaysia have started withdrawing monetary stimulus as growth accelerates and inflation returns amid the global economic recovery. Philippine exports, which account for about a third of the nation’s $167 billion economy, rose at the fastest pace in more than 14 years in January, a report showed yesterday.

“Upbeat export readings would nudge policy makers’ priority away from downside risks to growth, and more into emerging inflation risks,” Jun Trinidad, an economist at Citigroup Inc. in Manila, said in a report yesterday. It “would support the phase out of accommodative liquidity measures.”

Philippine economic growth accelerated to a one-year high of 1.8 percent last quarter from a decade-low 0.4 percent in the previous three months, lifting prospects for the country’s property and food companies. Jollibee Foods Corp., the fast-food chain that outsells McDonald’s Corp. in the Philippines, is looking forward “to a more robust growth in 2010,” the company said last month.

Capital Flows

The government forecasts the economy will expand 2.6 percent to 3.6 percent in 2010, as President Gloria Arroyo, whose term ends this June, increases outlays on airports, bridges and state programs to a record 1.54 trillion pesos ($34 billion) this year to bolster growth.

Low interest rates in the U.S. and Europe and faster growth in Asia are spurring capital flows into the region, prompting China to start draining excess cash from the economy to prevent asset bubbles free online credit report. Australia and Vietnam have raised borrowing costs as inflation accelerates, and Malaysia last week increased its overnight policy rate, saying it wants to avoid “financial imbalances”.

Bangko Sentral in January announced the year’s first increase in the interest rate that it charges lenders for borrowing money from the central bank through the rediscounting facility. The rediscounting window allows lenders to borrow using loans as collateral.

Inflation Forecast

Deputy Governor Diwa Guinigundo said yesterday the unwinding of liquidity measures is “always on the table” and will happen in “a matter of time.” Still, “the policy rates can be maintained at this point as our inflation outlook remains positive and benign,” he said March 8.

Benchmark four-year bond yields dropped to a three-month low yesterday on optimism borrowing costs will remain low. The Philippine peso traded near an eight-week high today as Asia’s rebound attracts funds to the region’s assets.

Bangko Sentral forecasts inflation may slow to a range of 3.4 percent to 3.5 percent in 2011 from an estimated 4 percent this year, Guinigundo said this week. Consumer-price gains in the Philippines eased for a second month in February to 4.2 percent.

The Philippines’ benchmark interest rate is at the lowest level since central bank data started in 1990. Easing inflation last year allowed Bangko Sentral to slash the overnight borrowing rate by 2 percentage points from December 2008 to July 2009 to support economic growth as exports collapsed.

Policy makers also reduced the proportion of cash banks need to set aside as reserves and raised the amount of money available for the rediscounting facility in late 2008.

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