‘No reason to tweak policy settings yet’


The United States Federal Reserve’s decision to keep rates unchanged at its July 27 meeting indicates that there is no reason for Philippine monetary authorities to tweak policy settings for now, the governor of Bangko Sentral ng Pilipinas (BSP) said.

Analysts, meanwhile, said the Philippines would benefit from the latest Fed decision in terms of capital inflows and low interest rates.

Explaining its decision to leave interest rates unchanged, the Fed said that risks to the economy have subsided and the labor market is improving, indicating that conditions are becoming more favorable for an increase some time later this year.

“The markets have viewed the Fed statement to be more hawkish than they had anticipated. With the assessment that near-term risks to the economic outlook have diminished, analysts see that there could be a move as early as September although the statement did not strongly point towards one,” BSP Governor Amando Tetangco Jr. said in a text message to reporters on Thursday.

That assessment, Tetangco said, should be overall positive for emerging market economies, including the Philippines, as it reflects a move toward normalization, and that the US will indeed be another pillar of global growth going forward.

“That said, this would still not be reason enough for us to change the stance of monetary policy,” he firmly said, noting that the “outlook for domestic inflation remains well-anchored, and domestic demand continues to be solid.”

Monetary authorities decided to keep key interest rates unchanged at their fourth policy meeting for the year on June 23, as domestic economy continues to remain firm.

The reverse repurchase (RRP) facility rate remained at 3.0 percent. The BSP also held corresponding rates on the overnight lending and deposit facilities steady at 3.5 percent and 2.5 percent, respectively. The reserve requirement ratio (RRR) was also left unchanged at 20 percent.

To recall, the central bank on May 16 cut its headline rate to 3 percent from the current 4 percent as part of its shift to the Interest Rate Corridor (IRC) system on June 3.

Capital inflows seen

The Fed’s decision to keep rates unchanged will probably keep the flow of funds heading eastward, according to Bank of the Philippine Islands associate economist Nicholas Antonio Mapa.

“We’ll see foreign flows into Asean [Association of Southeast Asian Nations] and the Philippines,” he said in an e-mailed response to The Manila Times.

Mapa noted that Asian currencies and stock markets are expected to benefit, but stressed that the key is to find a way to keep this money interested enough in the markets to stay even when the tides have turned.

Once the Fed signals it is ready to hike, funds can flow back to the United States and that will put pressure on our bond, equity and foreign exchange markets, he added.

“But if we can prove that our markets will remain an attractive investment destination, even after a Fed rate hike, funds will opt to remain a little while longer,” he said.

Steady rates until June 2017

ANZ Research economist Eugenia Victorino said the think tank has shifted its forecast for a policy rate increase by the BSP to June 2017.

“While we expect headline inflation to maintain its ascent through the end of 2016, we see little risk of average inflation breaching the central bank’s 2 percent to 4 percent target range,” she said in an e-mail to The Manila Times.

Thus, ANZ expects the central bank to remain on the sidelines with regard to its interest rate policy and only tighten its policy rate by the second quarter of 2017.

“In the meantime, we expect further operational tweaks to the auction of the term deposit facility (TDF) to improve its function as a liquidity management tool,” Victorino said.

Unless and until the TDF window is able to absorb the majority of the structural excess liquidity in the banking system, she said, ANZ sees limited room for the central bank to lower its RRR.

The central bank earlier said that the banking system is currently awash with P1 trillion in excess liquidity, which creates no pressure to lower the RRR for banks.

However, it said that if that excess cash recedes by half through its liquidity mopping tools like the TDF, the RRR might be reviewed for relaxing.

The central bank awarded P50 billion of its TDF on Wednesday’s auction, rejecting most of the total P180 billion tenders received.

Oversubscription to the weekly BSP offers of TDF continued as funds poured in amid uncertainty over whether the US Federal Reserve would offer better yields through a rate hike in the near term.

At the July 27 auction, the BSP awarded P40 billion of the 28-day tenor and P10 billion of the seven-day tenor of the facility used as a liquidity management tool under the central bank’s IRC.


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