BSP tools ‘ready for external headwinds’


The central bank renewed its assurances to the financial markets over the weekend that it will use tools other than monetary policy to deal at once with any external headwinds to cushion their impact on the Philippine economy, reiterating that its policy stance remains anchored on its inflation outlook.

The central bank recently adjusted downward its inflation outlook for 2015 to 2.1 percent from 2.3.

“We have both monetary and fiscal space to help support the economy, should such be required,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco, Jr. said.

Last week’s turmoil in China’s equity market and the near-collapse of negotiations on the Greek debt crisis have added to the cloud of uncertainty hanging over the local financial markets, which have already been fretting over a slew of bad news on the domestic economy. That includes declines in the major indicators, including gross domestic product (GDP), foreign direct investment (FDI), balance of payments (BoP), manufacturing output and exports, which have all prompted global ratings agencies and lenders to cut their growth outlook on the Philippines.

“The developments in China, plus talks [to resolve the debt problem of]Greece and the timing of the Fed [rates]lift-off all add to market uncertainty, and thus a tendency for portfolios to rebalance, or stay in the cash market. What is important is to prevent an unraveling of market confidence,” Tetangco said in an email to reporters at the weekend.

Share prices have been retreating across the board on the Philippine Stock Exchange in line with regional and global reactions to the risks emerging largely from the slowdown in China’s economy and the debt crisis in Greece.

Further volatility is expected to drive the market this week, which closed last week below 7,400 points and is next seen being vulnerable to slipping into the 7,000-point territory. (See PH shares weekly outlook on this page)

China’s equity market has tumbled by 30 percent in less than a month, while Greece just submitted a new debt reform package, though reluctantly to the belt-tightening conditions set by its EU creditors, to save the country from financial collapse.

In the US, minutes of the June Federal Open Market Committee meeting showed that the Fed policymakers remained cautious about raising interest rates as they weighed the weak spots of the economy, along with the foreign risks that it faces.

Tetangco said the immediate impact of these developments is really on the financial markets, but stressed that the central bank’s monetary policy stance will continue to be driven by its outlook on inflation.

At its June 25 meeting, the Monetary Board of the BSP decided to adjust downward its inflation forecast for 2015. It now projects inflation for full­-year 2015 to reach 2.1 percent, down from a previous forecast of 2.3 percent. The latest headline inflation was for June, which stood at a low 1.2 percent, inflation outlook continue to be broadly balanced, with upside pressures emanating from pending power company petitions for power rate adjustments and the impact of stronger-­than-­expected El Niño dry weather conditions on food prices and utility rates.

On the downside, lower global economic activity is also seen posing risks to inflation.

Since September last year, the BSP has kept its key policy rates for overnight borrowing, or reverse repurchase (RRP) facility, at 4 percent, while the rate for overnight lending or repurchase facility has remained at 6 percent.

‘Other tools’
Tetangco said the central bank has other tools ready to contain any volatility in the financial markets.

Besides its key policy rates, the central bank uses macroprudential tools such as the special deposit account (SDA) rate and the reserve requirement ratio (RRR) for banks to boost economic activity in the country.

The SDA rate and the RRR for banks are kept frozen at 2.50 percent and 20 percent, respectively.

Tetangco, however, said the central banks is still of the view that the Philippine macroeconomic fundamentals remain sound despite the expected further weakness in the markets.


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