Policy rates adjustments to have negative effect on financial market this time – BSP

By Joann Santiago

MANILA, Feb. 2 (PNA) — Will the fresh cut in the Federal Reserve’s stimulus program prompt Bangko Sentral ng Pilipinas (BSP) to adjust its policy rates given the continued improvement of the world’s largest economy?.

BSP Governor Amando Tetangco Jr. does not think so saying that “as in the past, the Fed’s moves would only be one of the number of factors we consider in our over-all analysis.”

“Our primary focus for any policy adjustments remains the outlook on domestic inflation over the policy horizon.”

Philippine monetary officials continue to see manageable inflation outlook amid the uptick of domestic inflation rate last December to a two-year high of 4.1 percent due to impact on some commodities of the recent calamities in the Visayas.

Last November, rate of price increases stood at 3.3 percent while full-year inflation rate averaged at three percent, the lower end of the central bank’s three to five percent target for 2013-14.

Since the last 25 basis points cut in the BSP’s policy rates in October 2012, Philippine monetary officials have not touched the policy rates after cutting it by a total of 100 basis points that year.

The series of policy rate cuts were made to help boost growth of the domestic economy and cushion the possible impact of negative external developments on the Philippine economy.

To date, the central bank’s overnight borrowing or reverse repurchase (RRP) rate is at record-low of 3.5 percent while the overnight lending or repurchase rate (RP) is at 5.5 percent.

Last week, the Federal Open Market Committee (FOMC ) decided to cut by another US$ 10 billion the Fed’s bond purchases program effective next month after noting the continued improvement in the US economy.

The Committee approved the US$ 5 billion cut in the current US$ 35 billion monthly purchase of mortgage-backed securities and the US$ 40 billion acquisition of longer-term Treasury securities.

This is the second US$ 10 billion cut the FOMC approved for the US$ 85 billion monthly bond purchase program of the Fed. The first cut was made last December and took effect on January 1, 2014.

Tetangco said the decision to further taper the Fed’s bond purchases is an “affirmation that growth in the US is gaining traction.”

“So, this should be, over medium/long term, positive for our own growth story,” he pointed out.

Relatively, the central bank chief said the impact of the new cut in the Fed’s stimulus program would impact on the financial market of emerging market economies (EMEs).

“For this, policy rate changes are not necessarily the most appropriate response at this time,” he said.

“Tweaking policy rates to address short-term financial market volatility could likely create unintended consequences, and heighten volatility even more,” he added. (PNA)