BSP watchful of asset price bubbles

Posted at 10/24/12 8:13 AM

MANILA, Philippines - Large capital inflows flooding the country will take center stage during tomorrow’s policy rate meeting as the Bangko Sentral ng Pilipinas (BSP) remains comfortable with inflation expectations amid strong growth.

These flows, BSP Governor Amando Tetangco Jr. said, are being channeled through more bank lending and portfolio inflows in bonds and stocks as consumer demand remains healthy.

“We are watchful of possible asset price bubbles (though) based on our econometric calculations, there is still no evidence of stretched valuations,” Tetangco said.

“We will consider all these in our next policy rate setting this week,” he added.

The market has penciled in a 25-basis-point rate cut on Thursday after Tetangco last week indicated BSP is ready to curb “excessive” appreciation of the peso, which trims dollar export and remittance earnings, brought about by large capital inflows.

This time around, Tetangco’s statements are connected with continued increase of bank lending, which if proven to be practiced beyond standards, might risk a creation of asset bubbles or a situation when asset prices overshoot beyond real market prices.

Such is created when loans used to purchase expensive assets went default, putting pressure on banks’ balance sheets.

“Based on our survey of senior bank officers, the diffusion index for loan demand shows an increase in the demand for loans from enterprises and household loans… We are watchful of risks to these credit extensions in terms of credit standards for loans,” Tetangco explained.

For her part, HSBC economist Trinh Nguyen said BSP may slash rates to 3.5 percent and 5.5 percent “as inflation remains manageable” at 3.2 percent as of the third quarter. BSP targets three- to five-percent inflation this year.

She said the cut, should it happen this week, will be the last for the year as inflation is expected to pick up on the first half of 2013 “due to an anticipated return of global growth and an unfavorable base effect.”

“While we think a rate cut will be ineffective at stemming inflows, as these tend to be drawn by strong fundamentals, BSP’s inclination will still be to do what it can,” Nguyen said in a research note.

Peso, which opened at 41.30 yesterday, has been one of Asia’s best-performing currencies. It has strengthened by roughly five percent against the dollar since the last trading day of 2011.

BSP has trimmed policy rates thrice this year – on January, March and July – as it looked on supporting economic growth on the back of still weak global environment. With interest rates at their record-lows of 3.75 percent and 5.75 percent for overnight borrowing and lending, BSP encourages banks to lend more to boost consumer spending.

After this Thursday, policy meeting will be held for the last time this year on Dec. 13.