BSP: PHL has buffers vs. possible tightening in financial conditions vis-à-vis Fed rate hike

By Joann Santiago

MANILA, Aug. 24 (PNA) — The high liquidity situation in the Philippines will partly help the domestic financial market from the impact of any possible tightening in financial conditions once the Federal Reserve starts hiking its key rates.

Based on the minutes of the July 29-30, 2014 meeting of the Federal Open Market Committee (FOMC), many US monetary officials are confident that progress in the US economy are enough for the Fed to start hiking its key rates, which to date is at record-low of zero to 0.25 percent.

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said the BSP will continue to implement a “disciplined macroeconomic policies and prudent financial sector oversight” to “keep (the) house in order” pointing out that “the best defense is a good offense.”

He explained that Philippine monetary officials see “that there will continue to be broad stability in funding conditions” in the country once the Fed rates increase.

He explained that “rising rates will impact primarily on financial market volatility but we don’t expect significant tightening of financial conditions because of ample peso and FX (foreign exchange) liquidity.”

He also cited that “some counterweight is being exerted by the accommodative monetary policies of the BOJ (Bank of Japan) and the ECB (European Central Bank),” referring to the stimulus program being implemented by the said central banks.

“The BSP will also use the full menu of instruments in its toolkit to respond to the ebb/flow of capital, depending on nature of shocks,” he stressed.

Tetangco identified some of these instruments as the exchange rate flexibility, presence in foreign exchange market (if needed), interest rate action (if needed), liquidity-enhancing contingency measures (if needed), regulatory forbearance, and careful/clear communication to manage sentiment. These are the same policy responses that we used to stabilize the economy during the peak of the global financial crisis.

Currently, the Fed’s monthly bond-buying program amounts to USD 25 billion and some analysts forecast this to end by October 2014 and the key rates are projected to increase in the middle of 2015.

Tetangco cited that “there is still considerable uncertainty about the timing and the magnitude of the Fed’s shift into normalization mode.”

“Markets will continue to be highly sensitive to news about key indicators on growth, labor market conditions and inflation,” he added. (PNA)