Central bank to consider BoJ, Federal Reserve stance in today’s policy review

THE BANGKO SENTRAL ng Pilipinas (BSP) will assess the impact of the Bank of Japan’s (BoJ) latest policy decision in its review today, noting that it is also awaiting how the United States will move as these events could affect investor appetite towards the Philippine economy and other emerging markets.

The BSP’s Monetary Board meets today for their sixth policy review for the year, which comes right after the BoJ’s announcement of a shift in its policy approach yesterday and a ratesetting meeting by the US Federal Reserve.

“We will take into consideration the BoJ decision today and the Fed action tomorrow at our meeting this week. Our current assessment is that inflation remains manageable,” BSP Governor Amando M. Tetangco, Jr. said in a text message to reporters on Wednesday.

“Specific advanced economies’ actions as you know mostly affect only financial variables in the near term as they drive market sentiment. We will weigh if there would be any more medium term impact on inflation and act accordingly.”

The BSP sets benchmark interest rates with the goal of stable prices and a steady financial system. As of end-August, inflation averaged 1.5%, below the central bank’s forecast of 1.8% for the year and its 2-4% target band.

The central bank kept policy rates unchanged during their Aug. 11 meeting, citing robust domestic demand and manageable inflation. The Monetary Board last month kept the settings at 3.5% for the overnight lending rate, 3% for the overnight reverse repurchase rate, and 2.5% for the overnight deposit rate, keeping the procedural tweaks that took effect on June 3 as the central bank migrated to an interest rate corridor (IRC). Reserve requirement ratios were also maintained.

Ten economists tapped for a BusinessWorld poll late last week said they expect the BSP to keep policy rates steady, with robust growth and subdued price increases rendering no need for monetary stimulus.

Although Japanese authorities maintained current rates yesterday, Mr. Tetangco said that the BoJ’s pronouncements signalled that “further negative rates are to come in the future,” as it decided to adopt a yield curve targeting approach by buying 10-year government bonds to keep rates close to zero.

“The peso reaction to this has been in line with USD-JPY action in the market. After BoJ, market is now looking to see what the Fed will announce later tonight. We will include these in our policy rate discussion this week,” the central bank chief added.

The Fed ends its two-day policy meeting just hours ahead of BSP’s Thursday review, with market players awaiting for signals as to when a fresh rate hike will be imposed in the world’s biggest economy.

The Bank of Japan shifted key policies on Wednesday to target interest rates instead of its money-printing program, and recommitted to reaching its elusive 2% inflation goal as quickly as possible.

But it held off on deepening negative interest rates or expand-

ing asset purchases, saying the modification as aimed at resetting its stimulus program for a protracted battle to hit the price growth goal.

While Japanese stock prices rose and the yen weakened after the BoJ’s announcement, some analysts doubted whether the move will have a lasting positive impact on the market.

“The impression is that the BoJ is starting to pull back some of its troops from the battlefront,” said Katsutoshi Inadome, senior fixed- income strategist at Mitsubishi UFG Morgan Stanley Securities.

“The markets could now begin testing the BoJ’s commitment to its price target in the next few months.”

At the two- day rate review that ended on Wednesday, the BoJ abandoned its base money target and instead adopted “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero percent.

It maintained the 0.1% negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.

The BoJ said it would continue to buy longterm government bonds at a pace that ensures its holdings increase by ¥ 80 trillion ($ 781 billion) per year.

Under the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE), the BoJ will deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said in a statement announcing the policy decision.

“The BoJ will seek to lower real interest rates by controlling short-term and long-term interest rates, which would be placed as the core of the new policy framework,” it said.

Under QQE, the BoJ has been increasing base money — or the amount of money it prints — at an annual pace of ¥ 80 trillion ($783 billion). But analysts have said the BoJ will struggle to buy enough bonds in coming years with its huge purchases draining liquidity.

It decided in January to add negative rates to QQE.