Steady Fed rate ‘bodes well’ for PH

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BSP stays watchful of impact on peso

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The Philippines as a US trading partner welcomed the Federal Reserve’s latest decision to hold its key interest rates steady, but the Bangko Sentral ng Pilipinas (BSP) recognized a need to be watchful of the impact on the peso of an expected gradual tightening of the US monetary policy.

The US Fed, seeing the economy stable enough, did not raise its key rates at the conclusion of its two-day policy meeting on Wednesday, Agence France-Presse reported, but the global financial markets expect it to raise rates in the months ahead.

The BSP assured the domestic markets that Philippine inflation remains manageable, and that the economy should benefit from the US Fed’s latest move.

“The Fed downplayed as transitory and qualified the weakness in economic data. For the medium term, this bodes well for the trading partners of the US,” BSP Governor Amando Tetangco Jr. said in a text message to reporters on Thursday in reaction to the Fed announcement.

The US is one of the major trading partners of the Philippines. In February, Philippine exports to the US reached $754.22 million, while imports totaled $516.03 million.

Small depreciation

Tetangco said that in the near term, the Fed is seen remaining on track for a gradual policy tightening, which should not be disruptive to the financial markets because they have priced in two rate hikes.

“This may, however, lead to some small depreciation pressure on EME [emerging market economies]currencies
as the dollar strengthens,” he added.

On Thursday, the Philippine peso closed at P48.87:$1.

Tepid US growth downplayed

The Fed’s policy-setting Federal Open Market Committee (FOMC) voted unanimously to keep the federal funds rate in a range of 0.75-1.0 percent, just as most analysts had expected.

The FOMC members discounted the tepid growth in the first quarter—when GDP expanded by only 0.7 percent, the slowest in three years—as a one-time issue, while emphasizing the continued strong labor market and solid hiring.

“The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace,” the FOMC statement read.

The Fed raised its rates in March and December, given a steady job creation and some signs of mounting price pressures—and amid the wave of optimism in the early days of President Donald Trump’s term, with his promises of tax cuts and big infrastructure spending.

BSP to remain watchful

Tetangco said the BSP will continue to be watchful of shifts in market sentiment, changes in global growth prospects “should the US weakness turn out to be nontransitory.”

“Right now, the domestic inflation outlook is seen as manageable. Of itself, the Fed action is not sufficient to tilt the balance of risks to our baseline scenario,” he said.

The BSP chief said the monetary authority will continue to monitor oil price developments, supply/demand of basic commodities such as rice and petitions for increases in utility rates.

Tetangco said the BSP will take all these into consideration during the Monetary Board meeting on May 11.

‘Idiosyncratic’ factors

BSP Deputy Governor Diwa Guinigundo sees no need to tweak the central bank’s policy setting based on “idiosyncratic” factors in the country.

The “conduct of monetary policy in the Philippines certainly gives some weight to interest rate dynamics in the US and other advanced economies. But the major driver of policy is our idiosyncratic factors,” he said in a text message to reporters also on Thursday.

Of these factors is the BSP’s inflation outlook, he said, noting that the forecasts suggest inflation for both 2017 and 2018 will be within target.

The BSP forecasts 2017 and 2018 the average inflation rate at 3.4 percent and 3 percent, respectively, both within the 2 percent to 4 percent target of the government.

“The other is inflation expectations and definitely, these are well anchored on both our targets and latest forecasts. Third is the balance of risks. While our calculus suggests upside risks are more dominant, they are not enough to upset our target for the next two years,” Guinigundo added.

The Philippines has sufficient liquidity in the market, credit growth remains robust, consistent with the growth requirements, he added.

The latest government data showed that domestic liquidity, or M3, rose 11.2 percent to P9.49 trillion in March, while bank lending expanded 19.7 percent.

“In sum, given the data available to us at this point, there is very little basis for deviating from the current policy,” he said, in line with a recent comment made by Tetangco.

The BSP—after lowering its reverse repurchase rate to 3 percent from 4 percent on May 16 in the runup to adopting an interest rate corridor system on June 3 last year—kept its key policy rate unchanged at its second meeting for 2017.

The Monetary Board also held steady the corresponding rates for overnight lending and deposit facilities at 3.5 percent and 2.5 percent, respectively.

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