BSP sees near-term volatility after Fed hike

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Analysts consensus: BSP policy unchanged for now

The Bangko Sentral ng Pilipinas (BSP) expects near-term volatility in the financial markets following the United States Federal Reserve’s latest decision to raise its key interest rates, but reiterated that its own policy move will be guided by its assessment of domestic inflation.

The US Fed, as expected, raised benchmark interest rates Wednesday night (Thursday morning Manila time), citing a better labor market and moderately improving economic activity. The US central bank also affirmed its projection of a third increase in interest rates, essentially brushing aside weaker inflation concerns and consumption data in recent weeks, Agence France-Presse reported.

“In the near term, we may see some financial market volatility as markets adjust portfolios for the normalization,” outgoing BSP Governor Amando Tetangco Jr. said in a text message to reporters on Thursday, in reaction to the Fed announcement.


“But we will, of course, be mindful of near-term risks that may be addressed by macro prudential tools,”
Tetangco said, assuring the markets that the next monetary policy moves by the BSP will continue to be guided by its outlook on inflation.

Volatility aside, the Fed’s action was broadly anticipated by the market and reflects the positive outlook of the Fed on the US economy and labor conditions, Tetangco said.

“It also laid plans for shrinking its balance sheet, which gives the market another glimpse of the normalization process,” he said.

For the medium term, the positive outlook on the US economy should be good for the global economy, including emerging market economies such as the Philippines, he pointed out.

Tetangco is serving his second term as BSP governor until the end of June. His deputy, Nestor Espenilla, will be taking over the central bank reins on the first business day of July.

‘US economy rising moderately’

The Fed raised its key rates by another 25 basis points at the close of their two-day meeting on June 14, bringing the Fed Funds target range to 1.0 percent to 1.25 percent.

The US central bank’s projections showed a slightly strong gross domestic product (GDP) print, while inflation is expected to fall well below the Fed’s 2 percent inflation target for the year.

The Fed revised its US economic growth forecast upward for 2017 to 2.2 percent from 2.1 percent, saying “economic activity has been rising moderately so far this year,” with household spending and business fixed investment expanding.

It noted a recent slowdown in the labor market progress but felt that growth remained “solid.”

BSP policy seen unchanged for now

Analysts who have been tracking the Fed moves and their impact on the Philippines gave a consensus view that the BSP monetary policy will be kept unchanged in the next Monetary Board meeting, set for June 22.

In May 2016, in the run-up to adopting an interest rate corridor system on June 3 of that year, the BSP lowered its reverse repurchase rate to 3 percent from 4 percent a year earlier. It has since kept its key policy rate unchanged.

ING Bank Manila senior economist Joey Cuyegkeng said there is no compelling reason for the Philippine monetary authorities to change the policy settings soon as “inflation and inflation expectations are within that BSP target range.”

Headline inflation in the five months to May settled at 3.1 percent, within the 2 percent to 4 percent target range of the central bank.

Cuyegkeng expects a November rate hike, at the earliest, but pointed out that ING’s assessment continues to be open to a further delay in policy tightening to 2018.

“This depends on local inflationary pressures and expectations being moderate, and the pace of an FOMC [Federal Open Market Committee] monetary tightening being gradual and measured,” he said.

For Bank of the Philippine Islands Vice President and lead economist Emilio Neri Jr., the Fed decision will not have a meaningful impact on the BSP’s next policy meeting, given the low inflation prints in the last two months.

Headline inflation stood at 3.4 percent in April, before declining to 3.1 percent in May.

“Should Governor Tetangco and the MB decide to hike rates, it will probably be justified by inflationary expectations ahead of the implementation of the tax package (Train) next year,” he said, referring to the Tax Reform Acceleration and Inclusion bill approved by the House of Representatives in May.

Meanwhile, Singapore banking giant DBS sees the BSP raising its policy rates by 25 basis points to 3.25 percent in its August 10 meeting.

“With the fastest growing economy in the region, Bangko Sentral ng Pilipinas (BSP) has scope to start and lead rate hikes in the region over the next few years. If so, this will also be the first policy move under its new central bank governor,” DBS said in a reaction to the Fed rate hike.

Going forward, DBS said the BSP is expected to deliver another 25 bps hike by year-end and pause until mid-2018.

“Thereafter, the risks for more hikes will depend on the success of the government’s infrastructure overhaul in generating demand,” it added.

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