Region, Philippines in asset bubble danger if rates stay low — HSBC

There is no danger of asset bubbles forming in the Philippines, unlike in other countries in the region, but the Bangko Sentral ng Pilipinas (BSP) should raise rates within a year so asset prices will not surge to dangerous levels, an economist from the Hongkong and Shanghai Banking Corp (HSBC) said.

“So far, the Philippines is not in bubble territory. This will take time to develop. Bubbles are the result of persistent monetary policy imbalances, and the Philippines has not yet reached that stage,” HSBC senior Asia economist Frederic Neumann told BusinessWorld in an e-mail yesterday.

“If, however, rates do not go up for another year or so, while growth accelerates, property prices, for example, could continue to appreciate.”

The BSP has kept its overnight borrowing and lending rates at 4% and 6% since July last year to spur economic growth amid a global recession.

In its Macro Asian Economics report dated April 8 and co-authored by Mr. Neumann, HSBC Global Research reiterated that central banks in the region should raise interest rates soon, despite benign inflation in their territories since a prolonged lax monetary policy could lead to asset bubbles.

“Mind you, this bubble will blow for a good while longer, so there is little reason to worry about an imminent pop. But, prudent policy suggests that more needs to be done now to avoid imbalances growing ever larger,” it said.

HSBC Global Research said its analysis was based on the Taylor rule, which shows the ideal interest rates given the difference between actual inflation and inflation targets.

It provided a graph of the average interest rates of 14 economies in the region, showing that asset prices and inflation surged in 2008 while interest rates lagged. The graph also showed that as of March, the average interest rate for Asia was also below where it should be.

HSBC identified South Korea, Hong Kong and India as among the economies whose interest rates are way below where they should be.

When interest rates are low, investors tend to borrow more and plow these into various assets, jacking up prices and leading to bubbles. These prices, however, tank when investors pull back their money, realizing the high prices are artificial.

The popping of bubbles usually leads to economic pain since some investors lose out and are not able to repay their loans, leading to a rise in bad debts that slow down lending.

Last month, central bank chief Amando M. Tetangco, Jr. said rates may stay at their current levels since inflation remains benign. Inflation averaged 4.3% in the first quarter, which was within the central bank’s target of 3.5% to 5.5% for this year.

Sought for comment, central bank deputy governor Diwa C. Guinigundo said the BSP is not worried about local asset bubbles forming, “In [the Philippines], we don’t see as yet evidence of asset bubbles even as we said in the past we may have to review the monetary policy stance,” he said in a text message yesterday.

Mr. Guinigundo also said it might be misplaced to generalize the monetary stance across the region. “We have different output and inflation dynamics. The size of capital flows differ across countries although we continue to see stable economies and financial markets.”

Mr. Guinigundo added that no one can make a conclusive policy prescription and analysis based on the Taylor rule alone.

Two Tuesdays ago, he also brushed aside notions that asset bubbles were forming here, noting that the rise in asset prices was steady.

“Our bond market is very stable, the stock market is inching upward but it’s far off from the 3,800 we achieved two years ago. Our real estate is not yet exploding, so we are okay. Capital flows become a concern if these inflate asset prices but we don’t see that happening,” he said. — Don Gil K. Carreon –Businessworld