* Manila c.bank says to keep accommodative monetary policy
* Flags financial stability; no danger signs yet
* Prolonged low rates may lead to asset price inflation
* Inflation outlook "very, very favourable" (Adds quotes, details, background)
By Karen Lema and Rosemarie Francisco
MANILA, Dec 7 (Reuters) - The Philippine central bank warned on Monday that a stretched period of historically low interest rates may cause asset price inflation and complicate its job of keeping prices stable.
Deputy Governor Diwa Guinigundo said the central bank would "not necessarily" keep its policy rate at a record low even if the country was to meet its inflation goals this year and next. The stance contrasts with that of neighbouring Indonesia of keeping rates low if inflation stays on target.
But Guinigundo, who is part of the committee advising the policymaking Monetary Board, said the inflation outlook was "very, very favourable" and the central bank would keep its accommodative policy.
"We shall continue to keep a watchful eye, not only on the inflation outlook and the out-turn in economic activity, but also on relevant financial stability issues."
"While the previous accommodative monetary policy will be kept, a historically low level of interest rates may have an unwanted collateral effect on the way market players assess risks."
The central bank cut its overnight borrowing rate to a record low of 4 percent in July. It meets on Dec. 17 for the last time this year and markets expect it to keep the rate at 4 percent and leave it there until at least the second quarter of 2010.
Annual inflation jumped to a six-month high in November, due to higher costs of food, clothing and services, but is expected to be within the central bank's average inflation target of 2.5-4.5 percent this year and 3.5-5.5 percent in 2010.
"Low interest rates may drive a search for higher yields, this may also give birth to potential asset price inflation," Guinigundo said.
"It's possible that banks take more risks in terms of seeking higher returns on their investments if interest rates continue to be very low. And from the perspective of financial stability, this is not going to be something that should be allowed."
He said that this risk-taking could complicate the central bank's job of maintaining price stability.
Guinigundo reiterated the central bank may either slowly raise banks' reserve requirements or tweak its rediscounting budget as a first step to tighten policy. He said authorities have enough tools to manage volatility in capital flows.
But he said the monetary authority wanted to keep its special deposit account window to mop up excess cash from banks. (Editing by Jan Dahinten)