“Fragile” global economy remains a major challenge for policymakers, the Bangko Sentral ng Pilipinas (BSP) said in its second quarter Report on Economic and Financial Developments.
“Overall global economic conditions remain fragile as risks of weaker growth in emerging economies have increased due to domestic capacity constraints, weak external demand and possibility of tighter financial conditions should the unwinding of unconventional monetary policy in the US lead to capital flow reversals,” it stated.
The BSP said that geopolitical uncertainty in the Middle East, specifically in Syria and Egypt, also contributes to uncertainties as it could lead to oil supply disruptions and higher oil prices, and volatility in the global financial markets.
The report added that the biggest challenge for policymakers is to strengthen global economic growth, adding that many emerging market and developing economies face a “tradeoff” between macroeconomic policies to support weak activity and those to contain capital outflows.
“Macroprudential and structural reforms can mitigate the risks associated with this tradeoff,” it said.
Ready to act
For its part, the central bank affirmed its commitment to its mandate of safeguarding price stability, and ensuring a macroeconomic environment conducive to sustained growth.
“The risks to inflation outlook remain broadly balanced, supporting the argument for keeping policy rates steady,” it said.
The BSP mentioned that downside risks to the inflation outlook remains, because of the uncertainty over the strength of the global economy and its impact on international commodity prices, while higher electricity rates and continued strong liquidity growth could cause upside price pressure.
Meanwhile, the central bank report said that the eventual scaling back of the quantitative easing measures of the United States Federal Reserve could consequently lead to “corrections” in the foreign exchange market and weakening of the peso.
These, however, should be counterbalanced by the steady stream of remittances and continued capital inflows into the country, it added.
The BSP also pointed out its readiness to employ, from its menu of policy instruments, measures that will help ensure that the benefits of capital flows are maximized while warding off the potential destabilizing impact of volatile capital flows on price and financial stability.
“The BSP will also continue to maintain a market-determined exchange rate, while guarding against speculative flows that could contribute to the peso’s volatility and undermine the inflation target,” it said.
In the middle of downside risks to global economic prospects on the horizon, the central bank noted that contingency measures are in place to ensure adequate liquidity in the financial system, should capital flows reverse course.
“The BSP will maintain a comfortable level of international reserves to serve as added insurance against external shocks,” it said.
On banking regulation and supervision, the BSP added that it will sustain the reform momentum with a view to strengthen its resilience against shocks, as well as to enhance its role as a catalyst for durable long-term economic growth.
“Toward this end, the BSP continues to enhance its monitoring of financial market developments, as it also continues to put in place measures to strengthen the capacity of the banking system to endure shocks, including the adoption of expanded reporting standards for real estate exposures as well as the Basel III capital adequacy standards beginning January 2014,” it stated.