Q+A-Will Philippines be among first in Asia to raise rates?

MANILA, Sept 23 - The Philippines, one of few Asian economies to have escaped a recession, is considered one of the candidates in the region, alongside South Korea, Australia and China, for an early strike with an interest rate rise.

The Philippines is not grappling with asset price bubbles such as South Korea and Australia and bank lending has remained slow unlike in China.

But stronger-than-expected growth in the second quarter and a brighter outlook for the rest of the year and 2010 prompted some analysts to speculate the Philippine central bank might start raising rates as early as this year to head off inflation risks.

Central bank governor Amando Tetangco reiterated on Wednesday it was not yet time to shift from expansionary monetary and fiscal policies, and any change in stance will have to gradual. [ID:nMNB002465].

The central bank has cut rates by a total of two percentage points since December.

Here are some questions and answers about the outlook for Philippine interest rates:

WHAT HAS THE CENTRAL BANK DONE TO SUPPORT THE ECONOMY?

Other than cutting interest rates, the central bank reduced banks' reserve requirements by 2 percentage points in November 2008, freeing up around 60 billion pesos ($1.26 billion).

It also raised the size of its peso rediscounting facility twice to 60 billion pesos and also opened a short-term dollar repurchase facility and enhanced a peso repurchase window. It also allowed banks to reclassify financial assets to prevent any bank failures.

WILL THE CENTRAL BANK DO MORE TO SUPPORT GROWTH?

The central bank believes it has done enough to stimulate the economy with its series of rate cuts. It kept its overnight borrowing rate steady at a record low of 4 percent at its last policy meeting on August 20.

Policymakers have repeatedly said the current level of liquidity in the financial system is sufficient to grease the wheels of the economy without stoking inflation.

They also said pump-priming by the government in recent months should boost domestic demand and growth in the second half.

WHEN DO ANALYSTS THINK THE CENTRAL BANK WILL START RAISING RATES?

The market is divided, with some players expecting a rate rise as early as December. Others believe rates will only go up in the third quarter of next year.

Analysts betting on an early interest rate increase say the economy's stronger-than-expected second-quarter growth has shifted the central bank's stance slightly in favour of tightening.

They are convinced the Philippine economy will sustain its growth momentum, backed by resilient domestic demand due to a steady inflow of remittances from Filipinos working overseas.

The central bank now believes remittances will reach a new record high this year and grow more than 3 percent, revising an earlier estimate that the number would be unchanged from 2008.

Other analysts expect small tightening steps, with the central bank starting with mopping up liquidity from the market in the fourth quarter before it considers raising interest rates.

They said the country's favourable inflation outlook would allow the central bank to keep policy steady to support the economy and properly time its exit strategy.

WHEN IS THE FIRST RATE RISE PRICED IN?

Investors seem to be anticipating a higher policy rate within the next six months, based on market indicators.

The central bank's overnight borrowing rate is at a record low of 4 percent. The three-month PHIBOR <PHIBOR=> is at 4.12 percent but the six-month PHIBOR is at 4.43 percent, which implies the market has fully priced in a 25-basis-point rate rise. LINKS: - Reuters recent interview with central bank governor Amando Tetangco [ID:nMAN300369] - Timeline on the central's policy changes...[ID:nMAN491446]