source: Reuters

BASEL, Switzerland - Interest rates in the Philippines are appropriate given balanced inflation risks, which allow the central bank to pursue stable monetary policy without endangering growth, it governor said on Sunday.

Amando Tetangco also told Reuters China's recent move to make the yuan's exchange rate more flexible -- one of the key focuses for central bankers gathering on Sunday for the annual meeting of the Bank for International Settlements -- reflects confidence in the world's third largest economy and is positive for Asia.

The Philippine central bank held its policy rate at a record low of 4% for the eighth consecutive meeting in June but unexpectedly cut its 2010 and 2011 inflation forecasts, raising expectations that any tightening could be later and less than expected.

The downgrade comes even as the economy expanded 3% in the first quarter, its fastest in almost 22 years, prompting the government to raise its 2010 growth target to 5% to 6%.

"Growth rates in Q1 gave us a surprise. (But) it is unclear whether that kind of growth is going to generate additional inflationary pressures. Growth in Q1 even Q2 may have been influenced by election spending," Tetangco said in an interview in the Swiss city of Basel.

"There is a broad balance between upside risks and downside risks to inflation. Inflation dynamics are quite favourable. Given this we should be able to have the flexibility to preserve monetary stability and support economy growth ... We see interest rates as appropriate at this time."

On the full-year growth forecast, Tetangco said: "It's doable. There may be some deceleration (from the Q1) ... because of certain uncertainties such as what's happening in Europe, how it's going to impact other developed economies."

Multi-speed recovery

Tetangco said central bankers gathering in Basel will discuss China's economy, Europe's sovereign debt crisis and a recovery in the United States.

"The global economy is showing a multi-speed recovery, with emerging markets particularly those in Asia seen to lead this recovery. As a result of that, if a tightening cycle would start, it will be in Asia," he said.

"China is the main driver of growth in the global economy now. China is re-orienting itself towards the domestic economy. The (yuan reform) is really a sign that China's authorities are more confident that the recovery is on a solid footing. That should be positive for us in Asia."