BSP warns risk remains

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‘Fed freeze gives market relief, but must watch next China move’

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The Philippine central bank sees the US Federal Reserve’s decision to keep its key rates near zero providing immediate relief to emerging economies from uncertainty, but warned that financial markets must remain vigilant over China’s next policy moves.

Private economists share the central bank’s view that the Fed’s stance indicates risk still remains over the direction of prices in the near term.

“With much uncertainty still in global markets that could have an impact on the path of domestic inflation, the Fed opted to keep rates steady, to avoid (in my view) potential policy reversal,” BSP Governor Amando Tetangco Jr. said in a text message to reporters on Friday.

The Fed, at the conclusion of the two-day meeting of the Federal Open Market Committee (FOMC) on Thursday (Friday morning Manila), decided that the “0-0.25 percent target remains appropriate” for now based on the current inflation outlook and recent global economic developments.

Fed chair Janet Yellen said the ongoing crisis in China and recent turmoil on world markets had played a role in keeping borrowing costs at zero.

In his assessment, Tetangco sees the economic slowdown in China, low global oil prices and the US dollar appreciation continuing to dampen domestic US inflation, albeit positive deflationary pressure.

While some may say the Fed could have just done even a token hike this time, just to have this “off the market’s mind,” the Fed seemed to have needed more from the data, Tetangco said.

“What would this imply for emerging markets, including the Philippines? We may see some near relief for emerging markets with good fundamentals and yield pick-up (as we had seen over the past few days),” the BSP governor said.

Over the medium term, however, the markets will have to watch for more definitive action from the Chinese authorities, he added.

Tetangco pointed out that the BSP’s preemptive tightening moves last year remain relevant, while domestic demand appears steady.

“We will watch prices to see how the market is digesting the Fed move, check for any impact of portfolio flows on domestic liquidity, and evaluate new inflation forecasts, to see if there is a need to finetune policy levers or communication,” he added.

Since September last year, the BSP has kept its rate 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.

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

Global risk remains

“The decision of the Fed to delay a liftoff also reflects an assessment that global risks remain and global growth remains relatively weak. These will eventually weigh on EM [emerging markets]currencies and financial markets,” ING Bank Manila senior economist Joey Cuyegkeng said.

Developments are being closely watched not only in China but also in other emerging markets, which are at risk from very low commodity prices and weak currencies, he said.
“Adjustments to overall China and EM views continue and would likely reach fragile stability in the near term, which would allow Philippine fundamentals to increase its influence on investor sentiment.”

Private analysts have also warned about other sources of headwinds that pose risk to the Philippines, such as the impact of EL Niño weather conditions on overall growth and inflation, as well as uncertainty for the peso from an impending leadership change given the 2016 elections.

Cuyegkeng said the economic, social and political goals of candidates provide good sound bites, but because resources are limited and tradeoffs are likely, demanding clear plans of achieving these goals from the candidates is going to be critical for the markets.

“Candidates for the presidency will need to set out these priorities (tradeoffs) in their proposed roadmap for an inclusive economy,” Cuyegkeng added.

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