The Philippine central bank is prepared to raise interest rates if it sees signs the economy is growing too fast, while tolerating a weaker currency for now, Bangko Sentral ng Pilipinas Governor Nestor Espenilla said.
“When you do start jacking up interest rates is when we see signs of overheating in the economy,” he said on Tuesday in an interview in Singapore.
“We’re not there yet,” he said, adding that the peso’s decline should be a signal to companies to avoid too much foreign borrowing and hedge their currency risk.
Economic growth in the Philippines, already among the world’s highest, probably accelerated in the second quarter, officials said.
Official data is scheduled to be released today.
Espenilla, who took over as governor last month, is “much more laissez-faire” about the currency and is not worried about peso weakness, Citigroup Inc analysts including Johanna Chua (蔡真真) in Hong Kong wrote in a note released yesterday.
Solid fundamentals will eventually cap declines, they wrote.
The peso yesterday plumbed a new 11-year low of 51.61 per US dollar. It was little changed as of 1:49pm in Manila after falling as much as 0.5 percent earlier.
“The peso is market-determined. In accepting that the currency will adjust and will be more volatile, that also sends a signal. It creates market discipline as well,” Espenilla said.
Espenilla on Thursday last week kept the benchmark interest rate unchanged at 3 percent in his first policy decision since taking office.
Most economists surveyed by Bloomberg predicted that the central bank will raise rates by at least 25 basis points this year.
Inflation and fiscal position remain under control, Espenilla said.
The current-account deficit is not blowing up in a way that is hard to sustain, and previous surpluses were due to under-spending, he added.
Nevertheless, any shortfall will be kept within 1 percent of GDP, which is “very manageable and sustainable” and consistent with the Philippines’ economic growth potential of 7 percent, Espenilla said.
The central bank is also not worried about the inflationary effects of a tax reform bill that would help fund the government’s infrastructure spending of US$160 billion to US$170 billion over the next five years, he said.
Inflation could accelerate by 0.5 percentage points next year to 3.7 percent, from a revised forecast of 3.2 percent, and then fall in 2019 as the tax reforms lure “confidence-building” inflows that are expected to boost the peso, he added.
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