BSP sees no need to tweak policy


US Fed’s balanced view ‘good for global growth, trade’

The Philippine central bank sees no need to tweak its policy setting following the US Federal Reserve’s move the other night to raise its key interest rates, as expected, saying the US’ balanced view of inflation could be good for global growth and trade with its partners.

Analysts had predicted that the Bangko Sentral ng Pilipinas (BSP) would retain its benchmark interest rates after an expected US rate hike, but said it would probably make some adjustments to the reserve requirement ratio (RRR) for banks.

“The Fed’s move, though widely expected, still contained valuable market information, particularly the indication of a continued gradual pace of the next steps and the consequent market interpretation that the Fed is willing to let inflation overshoot” [its target], BSP Governor Amando J. Tetangco Jr. said in a text message to reporters on Thursday in immediate reaction to the US rate hike.

Tetangco said the Fed’s inflation outlook, in a way, could be seen as positive for risk sentiment in the near term, but added that on the whole, its balanced view could be good for global growth and trade, particularly for trading partners of the US such as the Philippines

“We will, therefore, watch out for further developments on the trade side to see the impact on banks and corporate credit activities,” he said.

“At the moment, however, given the Fed action was as expected and inflation for now is seen to be well behaved, there appears to be no need to tweak policy settings,” Tetangco added.

The BSP—after lowering its reverse repurchase rate to 3 percent from 4 percent on May 16 in the runup to adopting an interest rate corridor system on June 3 last year—kept its key policy rate unchanged at its first meeting for 2017.

The Monetary Board also held steady the corresponding rates for overnight lending and deposit facilities at 3.5 percent and 2.5 percent, respectively.

Monetary authorities have an inflation outlook of 3.5 percent for 2017, and 3.1 percent for 2018.

Details of the Fed move (see related story ‘US Fed raises benchmark interest rate a quarter point’ on B1)
The US Fed raised the benchmark interest rate by a quarter point at its March 15 to 16 meeting. In that meeting, the Fed’s policy-setting Federal Open Market Committee (FOMC) voted to raise the key federal funds rate to a range of 0.75 percent to 1.0 percent, although there was one dissenting voice. The higher benchmark interest rate will push up costs for mortgages and credit cards.

The FOMC statement noted that inflation was moving closer to the central bank’s 2 percent target, and “the labor market continued to strengthen” amid solid job gains, while “economic activity has continued to expand at a moderate pace.”

The FOMC once again said it expected those economic improvements to continue with only “gradual adjustments” in the policy interest rate.

PH unlikely to track Fed

London-based research consultancy firm Capital Economics said for most economies in emerging Asia, including the Philippines, it will be local factors and not the actions of the US Federal Reserve that will determine the next moves by the region’s central banks.

“With the Fed still projecting further rate hikes this year, there is likely to be speculation that Asia’s central banks will have to respond with rate hikes of their own,” Capital Economics’ Gareth Leather said in a report.
For instance, he noted that the People’s Bank of China just hiked rates on Thursday, while Hong Kong and Singapore—where exchange rate regimes mean a sacrifice of control over local interest rates—a rise in US interest rates could push up local rates.

“But elsewhere, there is little reason to think that central banks will need to follow the Fed’s lead… Indeed, historically there has not been a particularly close relationship between interest rates in Asia and the Fed funds rate,” he explained.

Leather, however, said that to the extent that US rate hikes do put pressure on Asian central banks to tighten policy, it will be through currency movements.

Nevertheless, he said that more generally, Asian central banks are unlikely to panic even if their currencies do lose some ground against the US dollar.

“US dollar-denominated debt is low across most of the region. Subdued inflationary pressures across the region mean that central banks will not worry about currency depreciation pushing up import costs. Finally, some central banks (and their country’s exporters) may welcome some currency weakness and the boost it should provide to their competitiveness,” he said.

Leather also pointed out that the upshot is that domestic factors will determine the outlook for monetary policy in most of Asia, not the US Fed.

“We think rates will remain low throughout the region this year…,” he added.

PH seen cutting RRR

Meanwhile, an analyst from a local lender who requested anonymity said the BSP could later adjust the reserve requirement ratio for banks lower.

The analyst said the BSP’s second monetary policy on March 23 represents probably the last window of opportunity for Governor Tetangco to slash the RRR, as he has been wanting to do as early as 2015.

“By doing so, he hopes to give the market an ample heads-up before his own projected rate hike probably at the May 11 meeting,” the analyst said.

Since May 2015, the central bank has maintained the reserve requirement at 20 percent to prevent a rapid increase in liquidity and credit expansion, which could threaten the stability of the country’s financial system if left unchecked.


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