Posted on 07:02 PM, February 12, 2010 [ BusinessWorld Online ]
The central bank is looking at tweaking banks’ maximum exposure to the real estate sector, among other measures, to prevent asset bubbles from forming as developed economies slowly exit from accommodative monetary regimes, resulting in large capital flows to emerging economies such as the Philippines.
At the same time, the Bangko Sentral ng Pilipinas said the rise in the prices of basic goods might accelerate in the next two quarters due to the dry spell induced by El Niño and higher utility costs arising from scheduled adjustments.
The central bank, said Deputy Governor Diwa C. Guinigundo, is considering further lowering the cap on banks’ exposure to the real estate sector, which would effectively curtail lending, and thereby, prevent the formation of asset bubbles as investors pour capital into emerging economies where interest rates are higher compared to developing economies that are slowly implementing exit strategies.
"Emerging markets like the Philippines have to design an exit that will constitute a prompt response to a possible delay of the developed economies because the more they delay, the situation of high liquidity and low interest rates abet search for yields and risk aversion and also affect cross border flows, and our own exchange rate and interest rate policies," he told a press briefing on Friday.
"[One] way of addressing the situation without spillover effects is through macroprudential measures such as a cap on the real estate sector. Like during the Asian financial crisis in 1997, we brought down the limit of banks’ exposure relative to total loans from 30% to 20%," he said.
He said an interest rate hike to address asset price bubbles -- or to make sure the central bank hits its inflation targets -- would only attract more capital flows from abroad.
Mr. Guinigundo stressed that while the central bank does not see an asset bubble scenario yet, a lower cap on banks’ exposure to real estate is available in case of a surge in capital flows.
At the same briefing yesterday, Antonio B. Cintura, director for economic research of the central bank said: "Our latest fan chart showed inflation will pick up over the next two quarters then ease gradually towards 2010."
He declined to say the average inflation the BSP expects for the first quarter, only saying this would stay within the 3.5% to 5.5% target this year. Last month, inflation slowed down for the first time in five months to 4.3%.
Mr. Guinigundo said monthly inflation could rise to 5% in the third quarter, but this would unlikely to go beyond the upper-end of the central bank’s target.
"Obviously the monthly inflation rate [will pick-up]... if you look at the annual average projection of 4.7%," he said.
Asked if the BSP has included in its inflation projections a severe El Niño phenomenon, Mr. Guinigundo said what central bank has considered is a moderate dry spell but noted the government has already put in place mitigation measures for this adverse weather condition.
"The government has already put in place mitigation measures such as early tenders issued by the NFA [National Food Authority] so there will be additional volume coming in time for the impact of El Niño," he said. -- Don Gil K. Carreon