Policy Stance Will Not Follow US Fed – BSP Chief

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. reiterated that the data-dependent monetary policy stance is still appropriate and there is no need to “adjust in sync” with the US Federal Reserve rates’ movements.

But, Tetangco cautioned the risks revolving a US Fed normalization despite having what he called a “deeper policy toolkit.” The US Fed raised its rates in December and there will be at least three more hikes this year.

“If the Fed veers from this, volatility in both the global and domestic FX and fixed income markets could rise,” he said.

The BSP’s arsenal of toolkits include macroprudential regulations that are “targeted to specific sources of risks” and contingency measures such as liquidity-enhancing facilities and its rediscounting windows. “We intend to further refine these tools as appropriate,” Tetangco said in a recent gathering of businessmen and investors at the Rotary Club of Manila and Forbes Park. The BSP can also tweak its “regional firewalls” if needed.

He added, “a steeper than expected hike in US interest rates could lead to a faster rise in domestic commercial and government securities interest rates also, as well as stronger depreciation pressures on EME (emerging market economies) currencies, including the peso.”

Tetangco said these price movements will have an adverse impact on local banks and corporations with foreign loans and floating-interest rate obligations. “(Also) a tightening in domestic financial market conditions could also dampen domestic credit activities in the near-term.”

“(If) the reason for Fed tightness is that the underlying US economic growth has become stronger, then that may offset some of the near-term negative impact of the Fed tightening and lead to over-all support for global growth in the medium-term. On the other hand, if the Fed turns dovish (fewer or no further hikes in 2017), then that could encourage ‘risk on’ market behavior, stall domestic interest rate increases and dampen depreciation pressures in emerging markets,” warned Tetangco. “But such result is unlikely, as Trumponomics, which is reported to focus on increased fiscal spending, is widely expected to be inflationary.”

The BSP chief said the BSP, while it can move in another direction than that of a rates-hiking US Fed, is still mindful of global market volatilities because “the Philippines is not immune to the repercussions of global headwinds.”

“In addition, we also have home-grown risks and ‘noise’ to deal with. The evolving nature of uncertainty in both the global and local environments requires that we be vigilant,” said Tetangco.

Other than watching the US Fed, Tetangco also has his careful eye on the Brexit and what a Trump presidency will do to the region.

“(For Brexit) the bigger concern is whether the other EU economies will follow the UK’s lead; given that our trade exposure to the EU is larger at around 12 percent,” he said. “As for the Trump election, we will need to see how his campaign rhetoric translates to actual policy. Our eyes and ears are tuned to January 20, when he actually takes over the White House.”

During the BSP’s last policy meeting in 2016, it decided – not surprisingly – to maintain the overnight borrowing rate at three percent as well as the overnight lending and the rates for deposit facilities. Tetangco said at the time that the potential impact of the US Fed hiking of interest rates on global financial market conditions will “give the BSP more time to assess evolving economic developments and calibrate its policy tools as appropriate.”