The central bank said it will observe disciplined macroeconomic policies and prudent oversight over the country’s financial sector to counter any risks that may yet come from the expected tightening of global financial conditions.
The Bangko Sentral ng Pilipinas (BSP) made the statement following the recent release of the minutes of the United States Federal Reserve’s July 29 to 30 meeting.
The minutes revealed that many committee members were more hawkish than expected, with some going as far as saying that progress was already “sufficient to call for a relatively prompt move toward reducing policy accommodation.”
According to the minutes, many wanted further evidence before changing their view on when rates should rise.
“There is still considerable uncertainty about the timing and the magnitude of the Fed’s shift into normalization mode,” BSP Governor Amando Tetangco said in an email to reporters over the weekend.
Tetangco pointed out that markets will continue to be highly sensitive to news about key indicators on growth, labor market conditions and inflation.
“For the BSP, the best defense is a good offense: disciplined macroeconomic policies and prudent financial sector oversight will continue to be observed to ‘keep house in order,’” he said.
The BSP’s Monetary Board started to gradually tighten its monetary policy at its March 27 meeting when it raised the reserve requirement ratio (RRR) for banks to 19 percent, then further to 20 percent at its May 8 meeting in a bid to siphon off excess liquidity from the financial system. On June 19, the policy-setting body increased the rate on the special deposit account (SDA) facility by 25 basis points to 2.25 percent.
At its latest meeting on July 31, Monetary Board finally raised its two key interest rates by 25 basis points as preemptive response to signs of inflation pressures and elevated inflation expectations. The new rate for overnight borrowing now stands at 3.75 percent, up from 3.5 percent, and that of the overnight lending is now at 5.75 percent, up from 5.5 percent previously.
In terms of its financial sector oversight function, the central bank has ordered banks in the country to comply with the Basel III requirements at the start of 2014 to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, reducing the risk of spillover from the financial sector to the real economy.
The BSP also came up with new stress test requirements for banks that have real estate exposure. Under the new measure, banks will undergo stress tests to determine whether their capital levels are sufficient to absorb the risk from their real estate lending.
Meanwhile, the governor said rising global rates will have primary impact on financial market volatility but the central bank does not expect significant tightening of financial conditions in the country given the financial system’s ample peso and foreign exchange liquidity.
“Our baseline view is that there will continue to be broad stability in funding conditions,” he said.
Tetangco noted that some counterweight against volatility is being exerted by the accommodative monetary policies of the Bank of Japan (BOJ) and the European Central Bank (ECB).
The BOJ deployed an intense burst of monetary stimulus in April, when it pledged to double its money base with a quantitative easing program of asset purchases, while the ECB cut interest rates to record lows in June and launched a series of measures to pump money into the sluggish eurozone economy.
Finally, the BSP governor said the central bank will also use the full menu of instruments in its toolkit to respond to the ebb/flow of capital, depending on nature of shocks.
Tetangco said these instruments include: if needed—foreign exchange rate flexibility, presence in foreign exchange market, interest rate action, liquidity enhancing contingency measures, regulatory forbearance, and careful/clear communication to manage sentiment.
“These are the same policy responses that we used to stabilize the economy during the peak of the global financial crisis,” he concluded.