No need to take cue from Fed rates, but eyes on hot money outflows after Yellen speech — BSP

THE Bangko Sentral ng Pilipinas (BSP) said it does not have to decide on policy in step with the Federal Reserve’s moves, although the monetary authority is bracing for possible capital flight as markets react to the latest statement from the US central bank.

BSP Governor Amando M. Tetangco, Jr. said current monetary policy settings would remain appropriate even if the US Fed raises interest rates for a second time since December 2015, when the latter ended nearly a decade of near-zero rates.

On Friday, Fed Chair Janet L. Yellen said in a speech in Wyoming that the case for a rate hike

has “strengthened”, a pronouncement analysts said hinted at another “lift-off” in the world’s largest economy.

Favourable economic prospects at home and a “manageable” inflation meanwhile showed no need to provide additional stimulus.

“The Fed chair’s statement is more or less as expected, well balanced and nuanced. The BSP will not necessarily have to move in sync with the Fed should they indeed hike either in September or December as the Fed chair’s comments indicate that they are getting closer to their next move,” Mr. Tetangco said in a text message sent to reporters over the weekend.

“Our current inflation outlook continues to be manageable.”

During its Aug. 11 meeting, the BSP’s Monetary Board kept policy settings at 3.5% for the overnight lending rate, 3% for the overnight reverse repurchase rate, and 2.5% for the overnight deposit rate, maintaining procedural tweaks that took effect on June 3 as the central bank migrated to an interest rate corridor which saw a cut from the former 4% benchmark rate.

Inflation has averaged 1.4% over the past seven months, well below the central bank’s 2- 4% target range for the year.

VOLATILITY IN CHECK

Still, the BSP chief said the central bank is not discounting the likelihood of market volatility following Ms. Yellen’s statements.

“We are however mindful that there could be some near term financial market volatility as markets react to the Fed statement and rebalance dollar holdings. Nevertheless, the BSP has tools to keep market volatility in check,” Mr. Tetangco added.

“We will continue to monitor developments including changes in tax levies and weather-related disturbances that could impact on domestic price and demand dynamics, and make adjustments to our monetary policy stance as appropriate.”

Foreign portfolio investments, or capital that enter and leave the country with ease, opened the year with net outflows following the Fed’s rate hike last December. Hot money has since reverted to net inflows post-May 9 elections to reach a $1.65-billion net inflow as of end-July, according to BSP data.

Separately, monetary officials have said plans to reduce the current 20% reserve requirement for banks are underway, with the BSP waiting for a good time to infuse fresh liquidity into the local banking system. —