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Economy strong enough to absorb rate hike – BSP

The Philippine economy is expected to be resilient enough to absorb any tightening in monetary policy any time the central bank finds the right signal from the next stimulus cutback by the United States Federal Reserve.

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo reiterated over the weekend that at the current pace of domestic growth, the Philippine economy is ready to stand the impact and make adjustments to any move by the US Fed to raise its policy rates.

“We still have maneuvering room not only to hold on to the current rates but even to consider a possible increase in those rates should the US Fed decide to further tap down its monthly stimulus, or start increasing its own policy rates in 2015,” Guinigundo told reporters.

Philippine gross domestic product (GDP) registered 7.2 percent growth for full-year 2013, and although expected to lose some steam this year, it is still forecast by the World Bank to expand this year by a brisk 6.6 percent.

The BSP has also warned that upside risks to inflation remain despite a slowdown to 4.1 percent in February and 3.9 percent in March.

“The economy can absorb or accommodate those macroprudential measures that the BSP may start to implement if and when it is necessary to do so,” Guinigundo said.

The emergence of new industries such as business process outsourcing, better external debt, and fiscal and labor dynamics enable appropriate policy response against possible risks, Guinigundo said.

“We have strong macroeconomic fundamentals enabling the government and the central bank to undertake policy measures that are considered to be important and necessary. I think this is where the Philippine economy is right now,” he said.

In a March 27 monetary policy meeting, the Monetary Board of the BSP indicated a bias toward policy tightening by raising the reserve requirement ratio (RRR) for commercial banks by 1 percentage point to 19 percent, which took effect starting April 4.

The BSP has said the future path of inflation is likely to stay within the target ranges of 3 percent to 5 percent for 2014 and 2 percent to 4 percent for 2015. The central bank has also lowered its inflation forecast for this year to 4.2 percent from a previous projection of 4.3 percent.

However, the country’s highest monetary authority warned that inflation continues to face upside risks despite the easing seen in the months of February and March, leaving little room to keep key policy rates steady. The next Monetary Board meeting is set for May 8.

Last week, the minutes of the US Fed’s March 18-19 meeting showed that policy makers were set to maintain a steady cutback to the stimulus program in view of a recovering economy.

Led by its new chief Janet Yellen, the Fed decided at the March gathering to implement a third monthly cut since December of $10 billion in its bond purchases, pulling the program down to $55 billion.

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