BY THE MANILA TIMES BUSINESS NEWS TEAM AND AFP
Markets now digesting temporary setback in stocks, peso
An interest rate hike in the US in June is no longer just a possibility but a certainty as far as financial markets are concerned, and players in the Philippine market, like most investors around the world, are beginning to discount it as inevitable.
US bankers know it will soon be time to raise the key lending rate again, according to minutes from the last Federal Reserve meeting released Wednesday (Thursday morning in Manila).
US monetary authorities are seen waiting only for further confirmation of a firming growth trend in the economy before the impending interest rate increase takes effect.
“’Soon’ means a possible rate hike in June or July 2017,” Guian Angelo Dumalagan, market economist at the Land Bank of the Philippines told The Manila Times.
“A US rate hike next month could result in an increase in domestic (Philippine) interest rates, a depreciation of the peso, and a possible decline in the PSE index,” he said in an email.
“These events are likely to take place on account of potentially higher capital outflows to the US,” Dumalagan added.
The IHS Markit in Manila said with the US economy continuing to show steady growth, and unemployment having fallen to 4.4 percent in April, the lowest rate since May 2007, the US Fed is expected to continue to gradually tighten monetary policy during 2017 and 2018.
IHS Markit expects the US Fed to hike its policy rate again at its June FOMC meeting, with at least one further rate hike expected during the second half of 2017.
“Further monetary policy tightening is also expected from the Fed in 2018, with US GDP growth forecast by IHS Markit to rise from 2.2 percent in 2017 to 2.7 percent in 2018, which is expected to result in a further tightening of the US labor market and put upward pressure on wages growth,” said Rajiv Biswas, IHS Markit’s Asia-Pacific chief economist.
US Fed officials said planned spending by President Donald Trump’s administration could boost the economy more than currently forecast, although the details and timing of the projects “remain highly uncertain.”
Assuming the economy continues to perform as expected, with continued job and wage growth leading to a rebound in consumer spending and business investment, “most participants judged… it would soon be appropriate” to raise rates again, the Fed minutes stated.
“This looks like a signal that the US Federal Reserve will be hiking rates by 25 bps (basis points) this June, which would be consistent as well with market expectations. Furthermore, it’s very likely that the Fed will complete its total 75 bps hike by year-end 2017,” Marc Bautista, head of Metrobank Research, said.
Impact on PH economy
Dumalagan said the attraction of higher rates for the US dollar could also weigh temporarily on the general Philippine economy as that could lead to an increase in capital outflows and amplify market volatility.
However, Luis Limlingan, managing director at Regina Capital Corp., believes any capital flight from the Philippines would only be an initial reaction. He sees the BSP ready to counter its effect.
“In the short term, there may be a flight to better asset quality into the US, but this may be tempered with the BSP projected to raise its own rates soon,” he said.
“Will the BSP follow the trend [in raising interest rates]? Well, our projection is, sometime this quarter or the next. Is it justifiable for the BSP to hike rates? The policy has always been to fight inflation, unemployment, and protect against any sudden fluctuations [in the currency’s value]be it an appreciation or a depreciation,” he said.
Traditionally, Manila does not necessarily follow every rate hike in the US, Harry Liu, president of Summit Securities, Inc., said.
But even if the Bangko Sentral ng Pilipinas (BSP) does, given other domestic factors that could trigger a sudden spike in the local lending and borrowing rates, Liu does not see a big reaction from the local market.
“The BSP usually does not follow [the US in its rate hikes]… The BSP may follow or may not follow, depending on the market conditions. But given that you’ve heard it [the impending US rate hike it], I think the market also knows it. And I don’t think it’s a big problem,” Liu said.
The lending rate right now—based on current market conditions—does not seem to be a worrying factor yet. It seems it will not be a big problem. If you ask me, the market is absorbing the news already,” he added.