BSP to closely monitor impact of US rate hike

MANILA, Philippines - Monetary authorities will closely monitor the impact of the decision of the US Federal Reserve to raise interest rates by a quarter point on the country’s economic growth and inflation.

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the market reactions including the stronger dollar, lower stocks, and higher US treasury yields were widely expected as the market has already discounted a 25 basis-point hike.

“What will be spoken of more today is the Fed dot plot, which shows a more hawkish Fed than market first expected. But even then market would likely not dwell too much on that because market also knows that those dots do change over time,” Tetangco said.

US Fed chair Janet Yellen yesterday delivered a 25 basis-point hike, raising interest rates to a range of between 0.50 percent and 0.75 percent after the two-day meeting of the Federal Open Market Committee (FOMC).

The US Fed sounded hawkish with respect to hike in interest rates in the near future after it penned three quarter-point increases next year instead of two as of September.

The series of rate increases would be followed by three more rate increase in 2018 and 2019.

“Going forward, we’ll watch for indicators on how global markets judge the potential expansionary US fiscal policy, its impact on global demand, prices of global commodities and how these would affect our own domestic inflation and growth dynamics,” Tetangco said.

The Philippine Stock Exchange index plunged yesterday by 73.03 points from its record high of 8,127.48 recorded on April 10 and is now trading between the 6,800 to 6,900 level.

On the other hand, the peso briefly touched the 50 to $1 level late last month due to uncertainties brought about by the impending US rate hike. The local currency opened weaker and did not recover after the announcement of the rate hike by the US Fed.

“I am hopeful the recent US-peso movements have also factored these in and that any further movement during the balance of the year would only just be small refinements to bank positions,” Tetangco said.

For his part, BSP Deputy Governor Diwa Guinigundo said the rate hike by the US Fed is “a small step with a big meaning.”

Guinigundo said the rate hike also argues that low interest rates cannot last forever without generating financial sustainability risks.

Higher interest rates in the US would result in the outflow of funds in emerging markets including the Philippines back to the US. This could also result in higher cost of borrowings and investment costs as well as weaker currencies due to the strong dollar.