Philippines says fund flows pose inflation threat

MANILA, Philippines—A huge wave of foreign funds flowing into the Philippines could stoke inflation, the central bank warned Thursday as it announced steps to rein in the volume of cash in circulation.

Reserve requirements on bank deposits will rise by one percentage point from August 5, on top of a one-point rise ordered earlier this month, it said in a statement.

“The Monetary Board is of the view that sustained foreign exchange inflows… could fuel a further acceleration of domestic liquidity growth which could pose risks to future inflation,” it said.

“The Monetary Board believes that a prudent increase in the reserve requirement will help ensure that the inflation target will be met.”

The peso has surged to three-year highs against the dollar this month as foreign portfolio investments – money invested in stocks and securities – more than doubled to $9.1 billion in the first half, central bank data show.

The local currency closed at 42.17 to the greenback Thursday, from 43.6205 at the start of the year.

Bank lending activities have been growing at double-digit rates since January, the central bank also noted.

Meanwhile, the central bank kept its key policy interest rates unchanged Thursday, at 4.5 percent for the overnight borrowing rate and 6.5 percent for the overnight lending rate.

Inflation hit a 26-month high of 4.6 percent year on year in June, raising the average for the first six months of the year to 4.3 percent.