‘BSP has flexibility to handle capital flows’

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has “flexibility” to deal with capital inflows — including keeping rates low to shun speculative investors — with manageable inflation and healthy growth, an investment bank said.

“The central bank has relatively more flexibility to deal with inflows than many of its Asian counterparts,” DBS Ltd. said in a report.

Price pressures have been under control with inflation averaging 3.2 percent for the first two months of the year. It could end at 3.8 percent this year, well-within the official three to five-percent target.

Economic growth could slow down to six percent, following the 6.6-percent  expansion last year, and meeting the low-end of the government’s six to seven-percent goal. DBS said growth in 2014 could also be six percent.

 â€œThe economy is currently going through an extended period of high growth and low inflation that stretched from the (first quarter of 2012),” DBS explained.

The “sweet spot,” it said, could continue until the third quarter before inflation could begin to accelerate as high demand boosts growth. Despite this though, the BSP would likely keep key rates steady for the rest of the year.

BSP’s policymaking Monetary Board kept policy rates unchanged at 3.5 percent and 5.5 percent during its last meeting on March 14. It, nonetheless, slashed anew the interest BSP charges on special deposit account to 2.5 percent.

The move, DBS said, was meant to manage liquidity causing the peso to appreciate. It said macroprudential measures will continue to be deployed toward that goal.

“Possible measures include a further reduction in SDA rates and setting a minimum holding period requirement for the holding of securities,” it explained.

Credit growth will also not be a cause of worry as most of the money loaned by banks is now for business purposes than consumption purposes. This, DBS said, bodes well for future growth while keeping inflation in check.

Financial markets, on the other hand, will continue their bull run on the back of “improving foreign investor perception” to the Philippines. The benchmark Philippine Stock Exchange index has hit 28 record-highs this year, while the peso recorded four five-year records.

While soaring local markets is good news, DBS said the central bank would likely remain on guard against portfolio inflows and their tendency to provoke asset bubbles or reverse instantly.