BSP keeps close watch on capital flow reversals

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said monetary authorities remain watchful of flow reversals due to potential forces that could dampen the global growth momentum and spill over to the Philippine economy.

BSP Governor Nestor Espenilla Jr. said during the release of the 3rd Quarter 2017 Inflation Report that these forces include the anticipated normalization of monetary policy stance of central banks in advanced economies as well as the stronger growth across Europe.

As the US economy continues to gain traction, Espenilla said the US Federal Reserve has started to unwind its bond purchases and is widely expected to raise interest rates anew before the year ends.

The US Fed has raised interest rates twice this year, in March and June, and is expected to raise benchmark rates anew in December.

Espenilla said the stronger growth across Europe has also prompted the European Central Bank to ponder how to taper its asset purchases as early as 2018.

The BSP chief pointed out these developments introduces some degree of uncertainty.

“While we expect these developments to proceed in a well-calibrated and orderly manner, the unwinding of accommodative policies could have knock on effects on the rest of the world such as capital flow reversals from emerging economies like the Philippines,” Espenilla said.

On the domestic front, he explained the robust economic activity offers some insulation against external headwinds.

Espenilla said indications of higher government spending and household consumption anchor a solid outlook for domestic demand. The country’s gross domestic product (GDP) growth inched up to 6.5 percent in the second quarter from 6.4 percent in the first quarter.

Espenilla said inflation has been steady in the third quarter, averaging 3.1 percent in the first nine months of the year, well within the two to four percent target set by the BSP.

“The inflation path has also shifted higher due to recent increases in crude prices and the depreciation of the peso. The inflation outlook may still adjust upward owing in part to possible adjustment in electricity rates as well as the potential short-term impact of the government’s planned tax reform,” he said.

However, Espenilla said inflation would still fall within the two to four percent target.

“Such developments, however, are not expected to breach the inflation target. Moreover, lingering uncertainty in global economic conditions may still temper further the inflationary pressures,” he said.