The International Monetary Fund has urged the Philippine central bank to implement additional measures to tighten liquidity and, therefore, control inflation.
In a statement on its latest assessment of the Philippine economy, the IMF said the Philippines, like other emerging markets in Asia, was likely to experience further growth in the inflows of foreign portfolio investments, which could further fuel growth in liquidity. This, it said, could be inflationary.
The IMF said that “normalizing” the policy stance of the Bangko Sentral ng Pilipinas (BSP) was a prudent response to address inflationary pressures.
“Normalization” of monetary policy entails bringing back liquidity-management tools, including interest rates and reserve requirement for banks, to levels prior to the latest global economic crisis that peaked in 2009.
“With abundant liquidity and the strong [economic] recovery, it may be necessary to continue normalizing the policy stance,” IMF said in a statement following its recently concluded mission to the Philippines.
“Strong capital inflows need to be carefully managed in order to avoid macroeconomic and asset price volatility,” it added.
The IMF statement was made amid reports of steeply rising inflows of foreign “hot money,” mostly in the form of investments in bonds and stocks.
Central bank data showed that in the first six months of the year, net inflows of foreign portfolio investments had amounted to $2.36 billion, up by 243 percent from $687 million in the same period last year.
The BSP has so far raised its key interest rates by a total of 50 basis points and the reserve requirement for banks by a percentage point.
With the moves, the BSP’s overnight borrowing and lending rates are now at 4.5 and 6.5 percent, respectively. The reserve requirement is now at 20 percent.
Prior to the latest global crisis, the key policy rates of the BSP stood at 6 and 8 percent. The BSP gradually reduced the rates until reaching 4 and 6 percent in 2009 in a bid to temper the ill effects of the global crisis on the Philippine economy.
The reserve requirement was also brought down from 21 percent to 19 percent in response to the crisis.
Lower interest rates and reserve requirement for banks were meant to increase demand for loans and make available more money for lending so that consumption and investments would grow amid an anemic global economy.
Following the recovery of the global economy that started last year, however, the IMF said monetary policy should be normalized to avoid inflationary effects.
In a recovery mode, low interest rates and reserve requirement could accelerate inflation through higher consumption.
To avoid breaching inflation targets, the IMF said, emerging economies like the Philippines should continue tightening liquidity growth.
Latest inflation data from the government showed that the annual inflation rate reached 4.3 percent in the first six months of the year. This was still within the full-year target of 3 to 5 percent, but faster than the average of 3.8 percent posted last year.