Central banks urged to brace for global financial risks – BSP

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Global financial markets are not currently experiencing unusual
volatility, but central banks, including the Bangko Sentral ng Pilipinas (BSP), must carefully monitor risks that may come from their own markets and be prepared to respond, including raising interest rates if necessary, BSP Governor Amando Tetangco Jr. said.

“The risks are out there and internal banking has to be watched carefully for signs these risks may have an effect,” Tetangco said, citing underlying issues such as the monetary policy approaches of advanced economies and developments in broad sectors such as real estate as examples.

Tetangco made the comments on the sidelines of induction ceremonies for the new officers of the Rural Banking Association of the Philippines on Tuesday.

Having just returned from the Annual General Meeting of the Bank of International Settlements (BIS) held in Switzerland on June 28, Tetangco said that participants at the BIS meeting agreed there is low volatility in financial markets from a global perspective, but that the current condition is probably not totally consistent with underlying issues in individual domestic financial markets.


Growing call for rate hike
There is a growing call for central banks to start raising interest rates to maintain more durable growth trajectories, Tetangco said.

“This assessment [of interest rates]has to be processed in the context of our own situation and be part of overall surveillance of developments that can impact our markets,” Tetangco explained. “In the Philippines, we will continue to monitor and be ready to act as may be needed to deal with a change in investor sentiment,” he added.

Last month, the BSP’s Monetary Board defied the expectations of most analysts by keeping its key rates unchanged despite a 4.5 percent inflation rate in May, the highest monthly inflation print since November 2011.

Tentative calm
Tetangco seemed to signal, however, that interest rate hikes or other strong central bank action should not be expected in the near future, pointing out that growth in the Philippine economy still looks to have been sustained, although at a slower pace in the first quarter of the year.

“The financial markets are generally calm. There were some outflows in the early part of the year in reaction to ‘taper tantrum’ but that basically serves as a correction in the different financial markets—equity and bonds—in the country,” he said, referring to the ongoing reduction, or “tapering,” of the US Federal Reserve’s monetary stimulus program.

Otherwise, the BSP governor said, positive capital flows are returning to the Philippines and other emerging markets. “One reason for this is that there’s less macroeconomic uncertainty and projections of growth are still positive, leading to positive perceptions among global investors,” Tetangco added.

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