BSP chief quells fears of price bubbles in PHL market

Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco Jr. on Friday quelled regulators’ fears that price bubbles are forming from the upward trend of foreign inflows into emerging regional markets such as the Philippines. Markets form price or economic bubbles when speculation blows up the price of a commodity, until the prices reach more exorbitant levels and are led to drastically drop or burst. In his speech at the induction of officers of the Economic Journalists Association of the Philippines, Tetangco gave the assurance that the situation has not gone out of control. "While the domestic stock market continues to trend upward, its annual rate of increase is comparable with other bourses in the region," Tetangco said. "And while capital flows may result in increases in the country's money supply, the latter's growth continues to be in line with the economy's momentum and is not a cause of concern for inflation," the BSP chief added. Tetangco expressed confidence that macroeconomic measures, as well as the banking system’s regulatory framework, will prevent resource misallocation to form asset bubbles. "So far, there is no evidence of overheating in the credit market," he said. Economists have warned against the rise of asset prices in emerging markets, as liquidity has been lifted in recent months each time Asian central banks were forced to cut interest rates. The same liquidity released from global interest rate cuts feeds equity and bond markets in countries like the Philippines. Tetangco, however, said he remains unfazed, banking on positive investor sentiment due to prudent monetary policy and timely macro-prudential measures. The latter have supposedly contributed to low and stable inflation, he added. Tetangco said the forecast inflation – pegged at 4.4 percent from the original 3.6 percent – should prove within the target of three up to five percent for 2011 and 2012. Within-target inflation has emboldened the BSP to remain neutral on monetary policy since July 2009. It has also given room to the central bank to support growth and not to concern itself with price pressures. "Nevertheless, we are mindful of inflationary pressures which could come from higher-than-expected oil prices amid stronger demand from emerging markets and possible supply constraints, further increases in rice prices, the impact of adverse weather conditions on agricultural output and a stronger-than-expected domestic economic recovery that could induce demand-side pressures," Tetangco said. He added that the external sector, already a net recipient of cheap foreign capital, will remain buoyant over the near term. Tetangco said the balance of payments should remain at a surplus ranging from $6 billion up to $8 billion this year, and the gross international reserves of more than $63 billion last year should expand further up to $70 billion by the end of 2011. He noted that last year’s surplus in the balance of payments totaled $14.4 billion. - PE/KBK, GMA News