BSP exec warns of more uncertainty

MANILA, Philippines - Markets should brace for more uncertainty if the US Federal Reserve decides to further hold up raising interest rates or put an end to its monthly asset purchases, a Bangko Sentral ng Pilipinas official said ahead of the Fed’s meeting this week.

“Anything that will delay the normalization of the credit cycle in the US and the conclusion of the quantitative easing will force continuing uncertainty in the market,” BSP Deputy Governor Diwa C. Guinigundo said.

The US Fed will meet again this week to decide whether to finally end its massive bond buying program as planned or to defer it for another time. All eyes are on the two-day meeting which starts on Oct. 28 as analysts and market players watch out for the language the Fed will use to convey when it would raise interest rates.

But any delay in the Fed’s expected actions will also give the BSP some policy space, Guinigundo said, especially amid concerns of a slowing global activity.

“That can also provide on the other hand some space in terms of flexibility in maintaining our policy rates or our monetary policy stance at this point especially as growth has become a key issue for both emerging market and the advanced economies,” Guinigundo said.

Monetary authorities last week decided to keep key policy rates steady as inflation is expected to be within the three-to five-percent target range for this year and the two to four percent band in 2015 and 2016. Overnight borrowing and overnight lending were maintained at four percent and six percent, respectively, in a move widely expected by the markets.

BSP Governor Amando M. Tetangco Jr. last Thursday said latest forecasts showed a “lower inflation path” for 2014 until 2016 as pressures on commodity prices start to ease.

The BSP lowered its forecast for average inflation this year to 4.4 percent from 4.5 percent, while next year’s forecast was downgraded to 3.7 percent from 3.8 percent. The central bank also slashed its forecast for 2016 average inflation to 2.8 percent from three percent.

Inflation decelerated to 4.4 percent in September from 4.9 percent in August and in July due to lower increases in food prices and in housing and utility rates. This brought the nine-month average to 4.4 percent, still above the midpoint of the BSP’s target range for the year.

Tetangco said upside risks to the inflation outlook emanate from the pending petitions for power adjustments and the looming power shortages. However, the uneven prospects of the global economy should reduce pressures on commodity prices, he said. 

The central bank will revisit policy settings on Dec. 11, its last rate-setting meeting for the year.

The BSP earlier this year already raised key policy rates by 50 basis points to ensure inflation will remain within target over the policy horizon. At the same time, the reserve requirement ratios and the special deposit account facility rate were hiked to rein in excess liquidity in the system.