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Philippine central bank will lift rates if economy overheats

[SINGAPORE] The Philippine central bank is prepared to raise interest rates if it sees signs the economy is growing too fast, even as it tolerates a weaker currency for now, according to Governor Nestor Espenilla.

"That's always on the table," he said in an interview in Singapore on Tuesday. "When you do start jacking up interest rates is when we see signs of overheating in the economy. We're not there yet." Economic growth in the Philippines, already among the world's highest, probably accelerated in the second quarter, officials said before data due Thursday. The country is set to post its first annual current-account deficit in 15 years amid strong domestic spending and an infrastructure program that's pushing up imports. The budget shortfall is widening and the peso has dropped 3.4 per cent against the dollar this year, the worst performance in Asia.

Mr Espenilla, formerly deputy governor at Bangko Sentral ng Pilipinas, kept the benchmark interest rate unchanged at 3 per cent on Aug 10 in his first policy decision since taking office. Most economists surveyed by Bloomberg predict the central bank will raise rates by at least 25 basis points this year.

The peso is market-determined and its decline should discourage companies from over-borrowing in foreign currencies and should prompt them to hedge their risk, Espenilla said in the interview. The Philippine currency plumbed a new 11-year low of US51.47 per dollar on Wednesday. It fell 0.2 per cent as of 9.30 am in Manila, heading for its eighth straight daily drop.

"In accepting that the currency will adjust and will be more volatile, that also sends a signal," Mr Espenilla said. "It creates market discipline as well." Inflation and the fiscal position remain under control, the governor said. The current-account deficit isn't blowing up in a way that's hard to sustain, and previous surpluses were due to under-spending, he said. Nevertheless, any shortfall will be kept within 1 per cent of GDP, which is "very manageable and sustainable" and consistent with the Philippines' economic growth potential of 7 per cent, Mr Espenilla said.

GDP Report Gross domestic product data for the second quarter will probably exceed the 6.4 per cent pace recorded in the first three months of the year, Budget Secretary Benjamin Diokno said in a Bloomberg TV interview on Tuesday. GDP increased 6.4 per cent last quarter from a year earlier, according to the median estimate in a Bloomberg survey.

The economy is on track to post growth of 7 per cent for the full year, he said, underpinned by President Rodrigo Duterte's plan to ramp up spending on roads and railways.

Mr Espenilla said the central bank also isn't worried on the inflationary impact from a tax reform bill that would help fund the government's infrastructure spending of US$160 billion to US$170 billion over the next five years.

Inflation could quicken by 0.5 percentage point next year to 3.7 per cent, from a revised forecast of 3.2 per cent, and then fall in 2019 as the tax reforms lure "confidence-building" inflows that are expected to boost the peso, he said.  "The tax reform should not be responded to by monetary policy."