IMF cautions against low key rates

The International Monetary Fund has cautioned policymakers from the Philippines and other emerging countries in Asia against a potential spike in inflation, which it said could happen even as the region enjoyed robust economic expansion.

Naoyuki Shinohara, deputy managing director of the IMF, said in an interview that central banks in the region should consider raising their key policy rates over the medium term to avoid inflation from going beyond targeted ceilings.

In the case of the Philippines, the key policy rates of the Bangko Sentral ng Pilipinas are at historic lows of 4 and 6 percent for overnight borrowing and lending, respectively.

Shinohara said that policy rates—which influence commercial interest rates, and thus demand for loans, spending, triggering inflation—would remain low but not for too long.

He said that although governments should observe policies supportive of growth, they also must be concerned about acceleration of inflation that could happen as their economies expanded.

“Central banks need to strike a balance between risk of rising inflationary expectations and possible downside risks [to economic growth] coming from [weaknesses of] the global economy,” Shinohara said at the sidelines of the 45th annual meeting of the Board of Governors of the Asian Development Bank.

One source of inflation pressures is foreign capital inflows, the IMF official said. Because economies in Asia are growing much faster than those in the West, investors are naturally inclined to place their money in the former.

“Economic performance of the countries [in Asia] are better than that of the United States and Europe, so it is natural for capital to flow here. Central banks need to normalize their monetary policy stance over the medium term,” Shinohara said.

The rise in foreign capital inflows is said to be behind the rise in Philippine stock prices. The Philippine Stock Exchange Index has been setting record highs in recent days.

Shinohara said that while capital flows are welcome, central banks must ensure that these would not cause worrisome inflation levels. As such, interest rates should be increased eventually.