The Philippine central bank is watching more closely the timing of the US Federal Reserve move on its key rates and the financial markets’ reactions to it to determine a need to tweak its own policy rates.
Global financial markets have been cautiously trading with a view to an imminent Fed rate hike, seeing higher rates taking effect next month.
“The BSP will continue to watch signals to see if there is a need to tweak [our]policy stance,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said in a text message to reporters on Thursday.
Based on the minutes of the Fed’s previous policy meeting, which was held on July 28 to 29, most participants judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.
“Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement,” the minutes stated.
Some participants, however, emphasized that the US economy had made significant progress over the past few years and viewed the economic conditions for beginning to raise the target range for the Federal funds rate as having been met or were confident that they would be met shortly, it added.
Careful on timing
Tetangco said the market reading of the minutes was that the Fed was being careful in its consideration of the timing of a lift-off.
“I understand the minutes showed that while the Fed’s next moves remain data-driven, some FOMC [Federal Open Market Committee] members would like to also be mindful of the overall impact of any moves on the market,” he said.
The BSP governor points out such consideration is important for small open economies like the Philippines, which are essentially price-takers in this game.
“But as I see it, policy settings are still appropriately calibrated, and we can continue to allow the foreign exchange rate to respond to market conditions but with scope to rein in excessive volatilities,” he added.
Private bank sees no BSP intervention
An analyst from the Bank of the Philippine Islands (BPI) said he does not see the central bank aggressively intervening to change the market-driven range of the peso movement, unless it slides far too rapidly compared with other currencies in the region.
“The peso has been generally moving in line with regional currencies and I don’t think there is a specific trigger point in which the BSP will be called to aggressively intervene in the market,” Nicholas Antonio Mapa, associate economist at the Bank of the Philippines Islands (BPI), said.
The central bank is more likely to continue to allow peso-dollar trading to go in the direction determined by market forces, he said.
Mapa said the BSP is simply looking to stem excessive volatility but its gauge will always be how its other Asian peers are performing.
“The peso continues to outperform most of the region. [But] if the peso begins to weaken past most its peers, we’d see the BSP stepping in more aggressively,” he said.
The BPI analyst stressed that the Philippines has one of the best economic and market fundamentals that will continue to outperform the region.
Key interest rates have also remained steady. Last week, the BSP left its policy rates unchanged, although it lowered its inflation forecast for 2015.
The central bank now projects inflation for the full year at 1.8 percent, down from a previous forecast of 2.1 percent. For 2016, the forecast was retained at 2.5 percent.
The Monetary Board kept the rate for overnight borrowing at 4 percent and that for overnight lending at 6 percent.
The BSP also left the special deposit account (SDA) rate stead at 2.50 percent, while the reserve requirement ratio (RRR) for banks still stands at 20 percent.