Philippines may need to raise interest rates soon – IMF

Change in policy stance needed to ward off inflation risks

MANILA, Philippines – The country may have to start raising interest rates soon from the current record low of 4% to ward off inflation risks coming from strong liquidity, the International Monetary Fund (IMF) said on Friday.

The Fund kept its 2010 growth forecast of 7% for the Southeast Asian nation but raised its 2011 growth estimate to 5% from 4.5% in October, supported by an expected surge in investments in public infrastructure.

President Benigno Aquino is seeking partnerships between the public and private sectors to upgrade and rehabilitate roads, bridges and airports to reverse years of underspending by a cash-strapped government.

“With the narrowing output gap, it may be necessary to start normalizing the policy stance in the near term in order to forestall excess liquidity and inflation pressures,” the IMF said a statement.

“If the global environment were to worsen, or other downside risk materialize, the pace of policy normalization could be adjusted,” the Fund said.

Benign inflation has allowed the central bank to keep policy rates steady at 4% since July 2009. The Philippines is one of few countries in the region not to have raised rates since the end of the global financial crisis.

The IMF expects inflation to stay within the government’s target range of 3.5% to 5.5% this year and 3% to 5% in 2011, adding the near-term outlook was favourable.

“The fragile global economic environment remains a key risk to the outlook,” the Fund said. “Rising capital inflows need to be carefully managed in order to avoid asset-price inflation and macroeconomic volatility.”

Asia’s strong recovery from the global financial crisis has attracted a global shift in investments to emerging markets, boosting currencies and stock markets in the region and spurring fears of potentially destabilizing asset bubbles, especially in property.

Vivek Arora, chief of the IMF review mission, told reporters the budget deficit was expected to stay within the government target of P325 billion ($7.4 billion) this year, or 3.9% of GDP, a record in peso terms.

The deficit in the first 10 months of the year was P270.3 billion, more than four-fifths of the full year target.

The Fund said the Philippines’ focus on improving tax administration must be supported by measures aimed at rationalizing the country’s fiscal incentives to investors, and fixing other tax distortions. –Karen Lema, Reuters