SINGAPORE (Dow Jones) – Next year's presidential election doesn't pose a significant risk to inflation, the peso or the broader economy, with any impact likely to be as temporary as in past Philippine elections, Bangko Sentral ng Pilipinas Governor Amando Tetangco said Friday.

In an interview with Dow Jones Newswires, Tetangco said the Philippine central bank's biggest challenge is finding the right time to exit from its current expansionary stance, not any political risk posed by the May 2010 polls.

"I don't see any significant challenge from the election as far as inflation is concerned," said Tetangco, who is meeting other central bank governors and financial officials this week at the Asia Pacific Economic Cooperation.

"I don't think (the election) will have a significant impact on the currency, only if there's fear that there would be a change in economic policy or if there's going to be violence in the street," he said.

Any country's currency would weaken in such a situation, he added.

Tetangco, who has seen several elections and crises during more than three decades with the Philippine central bank, said the impact on inflation of increased spending during an election year "tends to be rather limited and nonpersistent."

The central bank forecasts average inflation at 4.02% next year, up from the average forecast of 3.28% for this year. Even so, that's still toward the lower end of the 3.5%-5.5% target range for the year.

Annual inflation hit a 17-year high of 12.4% in August 2008 due to higher commodity and oil prices. Inflation has steadily declined since then, allowing the central bank to cut its key policy rates by 200 basis points to bolster economic activity.

The rate-cutting binge stopped in August, and rates have held steady since then. Many economists think the central bank won't begin to reverse its expansionary stance until after the election, which will choose the country's next president.

"The exit has to be timed properly," Tetangco said. "It has to be timed in such a way that it does not prolong or generate inflationary pressures, and at the same time it does not kill a recovery."

Aside from domestic considerations, Tetangco said the BSP must also be mindful of the policy actions of its peers, underscoring the risk of excessive foreign currency inflows to the Philippines if the central bank tightens too quickly.

"You also have to see what other countries are doing," he said.

An overly strong peso could further hurt the competitiveness of the Philippine export sector and undermine the spending power of families of overseas Filipino workers, whose dollar remittances account for one-tenth of gross domestic product.

Tetangco reiterated that the central bank only participates in the currency market to smooth volatility and not to set currency levels, which he said should be determined by market forces.