BSP ‘unlikely’ to tail US Fed rate stance

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The Bangko Sentral ng Pilipinas (BSP) is seen likely to wait for a “clear indication” of strength from the local economy before adjusting its key policy, even if the United States Federal Reserve decides to raise its rates soon.

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On Wednesday (Thursday in Manila), the Fed hinted it will soon hike interest rates for the first time since 2006.

“Overnight, the markets generally viewed the Fed move as dovish in that while it paved the way for a hike, it lowered its forecast for benchmark rates,” BSP Governor Amando Tetangco Jr. said in a text message to reporters on Thursday.

The Federal Open Market Committee (FOMC) reaffirmed its view that the current 0 to 0.25-percent target range for the federal funds rate remains appropriate to support continued progress toward maximum employment and price stability, but hinted it is prepared to raise rates in the near future.

In determining how long it may maintain the target range, the FOMC said will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.

“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting,” it added.

Cautious markets

The BSP governor said the markets may remain cautious given the Fed’s guidance, and that the peso could continue to move in line with other regional currencies.

“We continue to be watchful of shifts in market sentiment as more data is released to confirm the underlying strength of the global economy,” he said.

Despite signaling that the BSP is not anticipating early rate action, Tetangco kept the central bank’s options open, explaining that the BSP will monitor how market reactions affect Philippine inflation dynamics and “will make adjustments to stance of policy as appropriate.”

Clearer signs of economic strength needed

Justino Calaycay, analyst at Accord Capital Equities Corp., suggests that the Bangko Sentral ng Pilipinas (BSP) must wait for a “clear indication” of a strong economy before tweaking its key policy rates.

The government’s target range for inflation for 2015 until 2018 is 2 percent to 4 percent.
Calaycay said that the overall market had expected that the Fed would drop the word “patience” from the language of its guidance.

He also noted that the Fed statement supports the view that interest rates will be adjusted beginning June this year.

“That takes care of one-half of the question—‘when.’ The Fed partially settled the second, equally important question ‘how much.’ Though not saying exactly the magnitude, it told of a ‘slow pace’ of increases,” he pointed out.

Calaycay said the BSP will have to look seriously at this development, but that any interest rate action on the BSP’s part will have to be pushed back to when the official figures or at least a clear indication of how the Philippine economy performed in the first quarter is known.

“Given the benign inflation outlook, the Monetary Board has elbow room to move interest rates either way. The balance will be tilted by the growth factor,” he said.

The analyst stressed that if the economy is able to sustain its fourth quarter growth of 6.9 percent, then there could be some bias for upward adjustment in the BSP’s benchmark rates “if only to protect the currency against the relative strength of the dollar.”

On the other hand, Calaycay said the central bank has to incorporate into its balancing act the fact that, except for the US, global central banks have generally been in an easing stance.

“All things considered, I think over the short-run, the BSP will most probably hold off any rate tweaks in the forthcoming meeting next week,” he said.

The Monetary Board’s second monetary policy meeting for this year is scheduled on March 26.

The current BSP rate for the overnight borrowing, or reverse repurchase (RRP) facility stands at 4 percent, while the rate for overnight lending, or repurchase facility was at 6 percent.

The rate for the special deposit account (SDA) stands at 2.50 percent, while the reserve requirement ratio (RRR) for banks was at 20 percent.

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