After the US Federal Reserve decided to keep its key interest rates unchanged in the face of a favorable economic outlook, the Philippines should continue to brace itself for volatility in the global financial markets, analysts said Thursday.
They said while the Fed move provides a temporary relief for the markets, the Philippines must prepare for possible US rate hikes later in the year.
The Bangko Sentral ng Pilipinas (BSP) said it will take into consideration the Fed’s decision last night to keep interest rates unchanged when the central bank’s monetary board meets next week.
“As expected the Fed kept its rates on hold. Its relatively positive outlook on the US economy suggested it is on track with policy tightening this year,” BSP Governor Amando Tetangco Jr. said in a text message to reporters on Thursday.
The Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 0.50 to 0.75 percent, saying that the policy stance remains accommodative to further support strengthening of the labor market and a return to 2 percent inflation.
The FOMC expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate which is likely to remain, for some time, below levels that are expected to prevail in the longer run.
Tetangco said the FOMC economic outlook is roughly consistent with what the BSP incorporated in its baseline scenario.
“We will note this development at our policy meeting next week, as well as the inflation outlook over the policy horizon,” he said, referring to the February 9 Monetary Board meeting.
On December 22 last year, the Bangko Sentral kept its reverse repurchase (RRP) facility rate at 3 percent, and the corresponding rates for overnight lending at 3.5 percent and deposit facilities at 2.5 percent. The reserve requirement ratio was also left at 20 percent.
Emilio Neri Jr., Bank of the Philippine Islands vice president and chief economist, said the Fed’s latest policy stance provides a temporary relief for the markets.
“However, given inflation trends and Trump’s protectionist policies, market continues to be aware there could be 2 or 3 rate hikes later this year. This should continue to be negative for portfolio flows in the bond market,” he said.
Rajiv Biswas, IHS Markit chief economist, noted the FOMC members recognized that US consumer and business sentiment have picked up since the Presidential election in November, increasing the upside risks for US economic growth in 2017.
“Furthermore the FOMC has also projected that inflation would rise to 2 percent over the medium-term. IHS Markit expects the Fed to hike policy rates three times in 2017, in response to stronger US economic growth and rising inflation,” he said.
The US Fed rate hikes this year are expected to support a stronger dollar against many global currencies, including Asian currencies such as the yen, yuan, ringgit and peso.
“If US growth and inflation indicators exceed market expectations, there is also a risk that the Fed could tighten more quickly than expected, creating risks of turbulence in global financial markets,” Biswas noted.
Earlier, private financial institutions expected the peso to weaken within the P50:$1-to-P52:$1 range toward the end of the year, with the most pessimistic view painting a scenario of worsening risk sentiment in case of a hardline trade stance between China and the US.
The peso closed at P49.72 against the greenback in 2016, depreciating by 5.35 percent from a year earlier.
Fitch-owned BMI Research placed the peso-dollar rate P50:$1, the strongest, while ING Bank Manila expected the peso to trade on the weak side at P52:$1.
First Metro Investments Corp. (FMIC) sees the peso trading at P51 against the dollar, staying under pressure as the US economy continues to gain traction and lead to a stronger US currency.
UBS noted the peso could fall to P51 to a dollar as the Philippine economy slows down, while the external position continues to deteriorate and inflation accelerates later this year.