BSP: US Fed rate hike already factored in

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said the possible interest rate hike by the US Federal Reserve this week would have muted impact on the financial markets as this has already been discounted by the market.

“That has been factored already by the market. Of course after the fact, the market would show some reaction but not as much when it is almost an anticipated and expected,” BSP Deputy Governor Diwa Guinigundo said.

The peso is the worst performing currency in the region, depreciating by almost two percent this year. It breached the 51 to $1 level but has recovered and is now trading within the 50 to $1 level.

The weaker currency has been traced to rising geopolitical tension between the US and North Korea, the normalization path taken by the US Fed, the country’s expected current account (CA) deficit arising from strong imports, among others.

“It’s very difficult to say at this point because the dollar is showing some signs of weakness and when the dollar is weak, you can expect capital flows to shift in favor of emerging markets including the Philippines,” he said.

The BSP has allowed the moderate and gradual depreciation of the peso against the dollar as part of its mandate to smoothen the volatility in the foreign exchange market and to support the expanding economy.

The country uses the gross international reserves (GIR) as buffer to ensure that the Philippines would not run out of foreign exchange that it could use to pay for imported goods and services, or maturing obligations in case of external shocks.

If it deems necessary, the BSP buys or sells dollars from the foreign exchange market to prevent the sharp depreciation or appreciation of the peso.

The country’s foreign exchange buffer has slipped to its lowest level in two years to $80.31 billion in November from the revised $80.42 billion in October.

The GIR could cover 8.4 months’ worth of imports of goods and payments of service and primary income. It is equivalent to 5.4 times the country’s short-term external debt based on original maturity and 3.7 times based on residual maturity.

BSP Governor Nestor Espenilla Jr. earlier said the country’s monetary policy setting is not tied with that of central banks in advanced economies particularly the US.

“Our monetary policy is independent of what the US Fed does. We’re not obliged to follow since we don’t have a fixed exchange rate,” he said.