MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is not expected to move in synch with the US Federal Reserve when it hikes policy rates anew as early as next month as part of its normalization path.
BSP Governor Amando Tetangco Jr. said in a text message to reporters the Philippine central bank would not necessarily match a possible interest rate increase by the US Fed as early as September.
“The BSP will not necessarily have to move in sync with the Fed should they indeed hike either in September or December as the Fed chair’s comments indicate that they are getting closer to their next move,” he said.
Tetangco attended the economic policy symposium in Jackson Hole, Wyoming where US Fed chair Janet Yellen announced the US is getting closer to raising interest rates again.
“The Fed chair’s statement is more or less as expected, well balanced and nuanced,” the BSP chief said.
He explained inflation in the Philippines remained manageable amid the strong economic growth. The gross domestic product (GDP) growth accelerated to seven percent in the second quarter from 6.8 percent in the first quarter amid the boost from election related spending.
The country’s inflation was steady at 1.9 percent in July, bringing the average inflation to 1.4 percent in the first seven months of the year. The BSP has set an inflation target of between two and four percent for 2016 to 2018.
“Our current inflation outlook continues to be manageable. We are however mindful that there could be some near term financial market volatility as markets react to the Fed statement and rebalance dollar holdings,” he said.
Tetangco said, monetary authorities have enough tools to deal with volatility arising from another round of interest rate increase by the US.
“Nevertheless the BSP has tools to keep market volatility in check. We will continue to monitor developments including changes in tax levies and weather-related disturbances, that could impact on domestic price and demand dynamics, and make adjustments to our monetary policy stance as appropriate,” he said
BSP Deputy Governor Diwa Guinigundo said interest rate differential is not the only factor driving capital flows.
Other factors include the macro economy, stable inflation, good external payments position, and sound banking system.
“Of course, it has been demonstrated in the past that herd behavior is very strong. I think by this time, investors can also take hint that a safe haven economy may not necessarily produce growth in the process,” Guinigundo said.
Robust domestic demand and the benign inflation environment allowed the BSP to keep interest rates unchanged since September 2014. Last June 3, the BSP implemented an operational adjustment reducing the overnight lending rate to 3.5 percent from six percent as well as the overnight reverse repurchase rate to three percent from four percent as it shifted to the interest rate corridor (IRC) system.
“Why should we follow the US Fed? We don’t necessarily need to be in step with the US Fed. The US Fed has a lot of catching up to do. The BSP is in an appropriate level of policy rates which have contributed to high-growth and low, stable inflation,” he said.
Likewise, the country’s gross international reserves (GIR) stood at a record $85.49 billion in July enough to cover 10.5 months’ worth of imports of goods and payments of services and income.