The central bank said it remains cautious but ready to deploy measures against the “pockets of risks” that could hamper the country’s economic growth momentum.
The Philippines’ gross domestic product (GDP) just hit its slowest pace in two years, growing 5.7 percent in the first quarter of this year compared with 7.7 percent a year earlier.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said such pockets of risks include those pertaining to price stability; the impact of the gradual tightening of United States monetary policy; and concerns over rapid growth in domestic liquidity and credit.
Tetangco said inflation is seen manageable over the policy horizon, even as its path has somewhat moved higher due to potential price risks coming mostly from the supply side, notably potential increases in power rates and higher food prices resulting from an El Niño episode expected in the second half of 2014.
“The downside risks to inflation are associated with the potential growth slowdown in key emerging markets and risk of deflation in some advanced economies,” Tetangco said in a speech at the Philippine Retail Investment Conference.
To help ensure that the BSP is able to sustain the “trend” of meeting the country’s inflation target, the monetary authority will continue to monitor developments and deploy appropriate measures as needed to ensure sustainable, non-inflationary, and inclusive economic growth, he said.
US Fed tapering
Tetangco noted that the movement of domestic financial instruments in May 2013, the fourth quarter of 2013 and on until the first quarter of 2014, exhibited volatility.
Nonetheless, he said the spillover effect of the US monetary policy normalization has gradually tapered off as portfolio investments are now showing inflows, reversing the outflows seen during the latter part of 2013 to the first three months of 2014.
“As sanguine as the future of the country may sound, we remain watchful of potential risks that could arise from the Fed’s actions,” Tetangco said, adding that the central bank will not hesitate to deploy contingency measures in response to any sharp volatility in capital flows.
The monetary authority remains optimistic that it is equipped to deal with potential market volatility with an expanded monetary policy toolkit and a broad-range of macro-prudential measures to help ensure financial stability.
Since 2011, the BSP has been instituting a series of macro-prudential measures to counter the build-up of financial stability pressures from the third risk to economy—high liquidity and credit growth that could lead to potential asset bubbles, Tetangco said.
These measures include adjustments in the capital risk weights on non-deliverable forwards, refinements in the special deposit account facility and increases in reserve requirements, he said. “All these have been calibrated so that while we try and limit speculative activity, we do not stifle legitimate inflows to the economy,” he said.
The use of macro-prudential measures has so far been effective, Tetangco said. “By and large, volatilities in the financial markets have been contained.”
“We can use our enhanced tool kit to ensure that volatility in financial and real asset prices is kept at manageable levels,” he added.