Central bank shrugs off ‘overheating’ scenario

MANILA, Philippines—Shrugging off concerns the Philippines may be at risk of overheating, the Bangko Sentral ng Pilipinas has assured the economy can sustain robust growth without having to face faster inflation.

According to BSP Deputy Governor Diwa Guinigundo, the production capacity of the economy has grown, thanks to rising investments seen recently.

As such, he explained, the growing demand for goods and services, which results from increasing incomes, can be sufficiently met by supply. Inflation, therefore, will not necessarily accelerate just because demand is rising, Guinigundo said.

“We have some evidence that, with capital formation improving beyond historical levels, potential capacity of the Philippine economy could have expanded in the last few years. Hence we have some convergence of high growth and stable inflation,” the BSP official said.

He also said the central bank constantly monitors factors affecting prices and is ready to make necessary adjustments in monetary policy to help keep inflation manageable even as the economy grows at a faster pace.

In the first three quarters of 2012, the Philippine economy grew by 6.5 percent year on year to become one of the fastest-growing Asian economies during the period. This prompted officials to project that the full-year growth for 2012 could have settled above the government’s target of 5 to 6 percent.

Economists said high growth rates usually come with faster inflation.

Echoing the same view, Deutsche Bank has warned that the Philippines may be at risk of overheating given rising consumer spending, which is aided by rising incomes. It also said interest rates in the county are too low and, therefore, could aid in faster inflation.

Deutsche expects inflation in the Philippines to speed up from 3.2 percent last year to 4.6 percent this year and 5 percent in 2014.

The BSP, however, has reiterated that inflation is likely to remain below 4 percent over the short term. Based on its latest estimates, inflation may slow down to 3.1 percent this year and 2.9 percent next year.

This inflation forecast holds even with the government’s optimism that economic growth will remain robust this year at a range of 6 to 7 percent, and at least 7 percent in 2014.