EVEN if the European Central Bank (ECB) were to end its quantitative easing (QE) earlier than scheduled, the net effect on the Philippines would still be manageable because of the country’s strong macroeconomic fundamentals, a central bank official said.
“I do expect the ECB to would be very circumspect in considering any talk of tapering its own version of quantitative easing through its massive monthly debt purchases of 60 billion euros,” BSP Deputy Governor Diwa Guinigundo told The Manila Times.
But if the bond-buying program continues as scheduled and meets its targets, the resulting economic recovery in Europe is expected to have a positive impact on emerging economies like the Philippines as well.
“That could translate into higher capital inflows, which could drive interest rates lower in the Philippines, (resulting in) higher liquidity and a weaker peso,” Guinigundo said.
“Depending on the relative magnitudes of adjustment, the net effect should be manageable in the Philippines than without the ECB and BoJ’s [Bank of Japan] countervailing policies. The country’s macroeconomic fundamentals remain sound and strong,” he said.
Guinigundo was responding to reports that the ECB’s decision makers are likely to quash talk of wrapping up the quantitative easing program early.
The ECB launched the program on March 9, buying nearly 61 billion euros’ worth of debt, thereby pumping money into the eurozone. The strategy was meant to bring down borrowing costs and foster easier credit.
The success of the first round fed speculation that the policy could be stopped before its planned September 2016 end date.
Guinigundo believes that ECB policymakers will really have to be convinced that the readings of all their parameters are as appropriately expected before any decision is made to end the QE prematurely.
“Policymakers should see borrowing costs come down, credit plentiful and with a weaker euro, exports are rebounding and contributing to stronger real sector activity. Higher inflation is also desirable for them at this point,” he explained.
Lower interest rates in the eurozone could drive capital to search for higher yields elsewhere, he said.
Given a perfect timing, these developments could provide some cushion when the impact of an opposite policy takes root in the United States, the BSP official said.
Asked about his views how an early termination of the ECB program could affect the Philippines, Justino Calaycay Jr., analyst at Accord Capital Equities Corp., explained that stimulus programs such as QEs unleash liquidity into financial markets.
“If there are clear signs that the European economy is benefitting from it, then an improved outlook for the region becomes a positive stimulus for stocks in that region. Otherwise, these funds will look for safer and better havens,” he said.
In this context, the Philippines may stand to benefit from it, like it did with the US Federal Reserve QE, which ended in 2014.
The analyst pointed out that the bigger picture should hold for rational investors.
“The ECB will not significantly alter or end the program unless either its utility proves of little value and impact to the overall objectives, or if it was so effective the said goals have been achieved way before the original calendar for program expires,” he explained.