THE Philippine central bank will consider the latest developments in the European Union and the United States when it meets to discuss monetary policy on May 12, particularly after the European Central Bank (ECB) left interest rates unchanged last week.
“The ECB move would have encouraged more ‘risk on’ behavior but this was tempered by good US numbers,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said.
“Thus, any regional strength that could have come out of the continued easy monetary conditions in the EU was dampened by strength in the US dollar . . . This confirms that in determining market reaction to policy, one must not consider developments in isolation. Rather, one should look at interactions of moving parts,” he added.
A risk-on environment is when investors perceive the investing waters are safe and buy stocks. Risk-on behavior, therefore, is when people want to put on risk to make money.
Aside from leaving rates unchanged, the ECB announced no new easing measures at its policy meeting on Thursday last week, with officials estimating that inflation will recover in the second half of 2016.
To the extent this policy stance translates to traction in EU economic growth, that should be positive for the emerging market economies that are trading partners of the European Union, the BSP Governor said.
As of the first half of 2015, the Philippines’ external trade with the EU amounted to $6.87 billion or 11.5 percent of total trade.
Meanwhile, US weekly jobless claims fell to their lowest level since 1973 at 247,000 in the week ending April 16.
“We will consider all these during our next policy meeting,” Tetangco said.
On track with IRC launch in Q2
Meanwhile, the central bank said it is on track on the implementation of the interest rate corridor (IRC) system this quarter, which an analyst said is not expected to make a huge impact on prevailing monetary policy in the country.
“We are preparing for the eventual launching in the second quarter,” Dennis Lapid, deputy director at the BSP’s Department of Economic Research, said over the weekend.
Lapid said the BSP has made pre-announcements to the banks to start with the transition process for the system, which will introduce key changes in the monetary operations framework to enhance policy effectiveness.
“Behind the scenes there are a lot of preparations already being done,” said Francisco Dakila Jr., managing director at the Monetary Policy Sub-Sector of the BSP.
Dakila stressed that implementation will be done in such a way as to make the least possible disruption to the system.
“The corridor system is going to be an operational change and does not involve a change in the stance of monetary policy. So there should be a smooth transition to the corridor system,” he said.
The changes will help improve the transmission of policy rate adjustments to relevant money market rates, and ultimately to key macroeconomic variables.
The IRC framework involves the establishment of the required infrastructure to effectively implement the monetary policy stance.
Infrastructure requirements include two standing liquidity facilities—deposit and lending—whose rates will form a corridor around the BSP’s policy rate and will be supported by auction-based monetary operations.
Meanwhile, an analyst said he does not expect the prevailing BSP monetary bias to change with the implementation of the IRC.
“We still expect the BSP to hold policy settings steady in the near term. Bloomberg consensus shows a steady policy rate environment for 2016,” said Joey Cuyegkeng, ING Bank senior economist.
The economist said that the failure by oil producers to agree to a production freeze at the April 17 Doha meeting indicates that the excess oil supply situation is expected to persist.
The analyst also said Philippine economic growth “is expected to improve this year on the back of stronger government spending, private consumption, election spending and fixed capital investments.”