Fed action to weaken currencies – BSP

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THE Bangko Sentral ng Pilipinas (BSP) renewed its commitment to monitoring the latest developments in the foreign exchange market following its assessment that the decision of the United States Federal Reserve to keep its interest rates near zero could result in a stronger dollar and may impact regional currencies.

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Private analysts also shared the view that the Fed action will create upward pressures on the local currency, and may be factored into the BSP’s policy decisions next year.

At the conclusion of the two-day meeting of Federal Open Market Committee (FOMC), the Fed pledged to keep interest rates near zero for a “considerable time” but indicated it could raise borrowing costs faster than expected when it does start moving on interest rates.

BSP Governor Amando Tetangco Jr. on Thursday said that many analysts had anticipated the Fed move to keep the language of maintaining its stance for a “considerable” time after the end of the asset purchase program.

“The dollar yields did move up last night, but not in a destabilizing manner. So, with this out, plus the Fed’s higher rate projections, and contrasting these with the expected policy moves in other advanced economies, markets could still view this as supportive of generalized USD strength, which could translate to near-term weakness in regional currencies,” Tetangco said in a text message to reporters.

Despite this, Tetangco said the BSP does not expect wild swings in regional currencies as a result of the Fed action.

“Nevertheless, we will continue to monitor developments closely and maintain a presence in the market as needed to smooth out excessive exchange rate movements,” he said.

Justino Calaycay, analyst at Accord Capital Equities Corp., observed that, “With local rates biased upwards and US rates unchanged at historic low levels, upward pressures on the currency increases.”

The analyst noted that the Fed has given what the markets expected, or “wanted,” adding that its assessment of the US economy remains what it was at the end of the previous meeting FOMC in July, suggesting there haven’t been significant changes in the present conditions or the outlook.

Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Island said the Fed move is in-line with the gradual recovery of the US as the Fed highlighted continued slack in the economy.

“Fed Chairman Janet Yellen did have a small adjustment to her statement, subtly injecting her take on the inflation trends.  Even if she retained her phrase ‘considerable time,’ she also indicated that the timing of the hike may be sooner than market expected,” he explained.

Mapa noted that Yellen hinted that when the rate hike cycle begins, it may be more rapid and sharp than markets expect it to be.

With that in mind, the economist believes that the Fed action will be factored into the BSP policy decision to adjust policy rates in 2015.

“BSP is presently in a normal state of monetary policy, after successively tightening in its last few meetings. This could cement our view that the BSP holds off on further hiking interest rates in 2014 and resumes pre-emptive tightening in the first half of 2015 ahead of the projected Fed interest rate hike cycle,” he said.

Finally, Mapa said that the era of low borrowing costs is slowly coming to an end in the Philippines.

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