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MANILA (Reuters) - The Philippine central bank is closely watching the rapid pace of domestic credit growth, even though it is being driven by legitimate demand, the incoming governor said on Wednesday.
"We're not being complacent about it," Nestor Espenilla, who takes the helm of the central bank next month, moving from his current role as head of banking supervision, said in an interview.
Bank lending in the Southeast Asian nation has been rising at a double-digit pace for at least two years now. In April, it grew an annual 19.2 percent, with the bulk of loans going to real estate, manufacturing and information and communication.
"The challenge for an economy like the Philippines is we are in catch up mode, so there is legitimate demand for credit and growth, you cannot suppress that. But one thing done too rapidly may also lead to mistakes," Espenilla said.
"We are closely monitoring these developments. These can lead to problems if credit is supporting businesses that may be more vulnerable to cyclical turns."
The rapid rise in credit growth, along with the double-digit rise in investment growth and a stellar pace of economic expansion, have fueled concerns of overheating and sustainability.
The Philippines remained one of Asia's fastest-growing economies in the first quarter, with gross domestic product rising an annual 6.4 percent, marking 73 quarters of uninterrupted growth. It is targeting growth of between 6.5 percent and 7.5 percent this year.
Some economists have said current economic conditions warrant an increase of as much as 50 basis points in interest rates in the second half to tame overheating pressures.
But Espenilla said the direction of the central bank's monetary policy would depend on consumer price expectations, and based on its projections, inflation is expected to fall within this year and next year's target of 2 percent to 4 percent.
"We are inside the inflation path," Espenilla said, adding that prices of fuel, energy and food remain well-behaved.
Annual inflation eased 3.1 percent in May, to its slowest pace in four months.
Espenilla said the Philippine economy was in "good shape" and should stay that way, given the government's big-spending overhaul.
The Philippines is pinning growth plans on higher infrastructure spending to create jobs, stimulate the economy and attract foreign investors put off by high power prices and poor roads and ports.
Amid a robust economy and tame inflation, the central bank is likely to keep its benchmark interest rate PHCBIR=ECI steady at 3.0 percent when it holds its next policy meeting on June 22.
Reporting by Karen Lema; Writing by Manolo Serapio Jr.; Editing by Raju Gopalakrishnan and Clarence Fernandez