Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco said Friday the country's inflation outlook remains "favorable" and indicated he's also comfortable with the peso's movements.

Inflation projections are "quite comfortable relative to the target range" of 3.5%-5.5% for this year and 4%-5% for 2011, Tetangco told CNBC in an interview. "There is room for inflation relative to the inflation target."

The BSP kept interest rates unchanged Thursday but continued to withdraw liquidity-enhancing measures introduced to help the economy cope with the financial crisis, removing a potential source of inflation pressure.

On the peso, the central bank chief said the local currency's rise so far this year has been in the middle of the range of movements by Asian currencies, while peso volatility has also been in the middle of its range.

"The central bank of the Philippines does not have an exchange-rate target," Tetangco said. The peso's value is basically market-determined, but the central bank steps in to smooth out "sharp fluctuations," he said.

After the policy meeting on Thursday, the Monetary Board allowed the BSP to continue to withdrawing liquidity-enhancing measures introduced to help the economy cope with the global financial crisis, easing potential inflationary pressures.

The BSP said the budget for its rediscounting window – a central bank facility where banks can have loans they extended to clients refinanced to improve their liquidity – will be reduced to P40 billion from P60 billion effective March 15.

Valuation standards on loans used as collateral for the rediscounting window will also be restored to pre-crisis levels. Overnight rates stay at 4% for borrowing and 6% for lending – the level these policy rates have been at since the BSP reduced them by 25 basis points each last July. The central bank's action was broadly in line with the market's expectations. The lower budget for rediscounting, along with the increase in interest rate on the facility in January, is expected to reduce the amount of cheap funds sloshing in the financial system that could stoke inflation.

Tetango said BSP is reviewing its “overall approach” to the rediscounting facility, which should be a bank’s “last resort” in raising funds, he said.

BSP will “follow a gradual and orderly monetary exit,” and interest rates are “still appropriate,” Tetangco said. The benchmark four-year bond yield fell to a three-month low. The peso traded at an eight-week high as Asia’s rebound attracts funds to the region.

Philippine exports, which account for about a third of the nation’s $167 billion economy, rose at the fastest pace in more than 14 years in January. The government forecasts gross domestic product will expand 2.6 percent to 3.6 percent in 2010, as President Gloria Arroyo increases outlays on airports, bridges and state programs to a record 1.54 trillion pesos this year to bolster growth. (Dow Jones and Bloomberg reports)