Use of macro-prudential measures to tame inflows risky, says Tetangco

MANILA, Philippines - Policymakers in emerging Asia should be careful in deploying macro-prudential measures targeted on taming inflows or else risk hurting economic growth in the process, the Bangko Sentral ng Pilipinas (BSP) chief said.

“It is important that policymakers are circumspect in the use of macro-prudential measures. The nexus between macro-prudential and monetary policies should be duly considered,” BSP Governor Amando Tetangco Jr. said in an article for Emerging Markets magazine.

For instance, restricting inflows through macro-prudential tools may “affect” borrowing of both the public and private sectors and as a result limit their capacity to spend, he said.

That, in turn, could put a dent to economic output.

 â€œThey may also weaken the transmission of monetary policy by tightening credit supply conditions,” Tetangco said, defeating the purpose of low interest rates that otherwise should have kept funding easily available.

Less credit could affect financing for projects that could boost economic activity.

The central bank has rejected imposing outright capital controls despite expectations more inflows could enter the Philippines after its recent promotions to investment-grade status by Fitch Ratings and Standard & Poor’s Ratings Services.

Instead, Tetangco said the BSP has resorted to macro-prudential measures to “help maintain stability in the financial system while we work on further development of the financial market.”

Since last year, the central bank has prohibited foreign funds from parking in special deposit accounts, cut the rate it offers, expanded the computation for real estate exposure and put a limit to banks’ non-deliverable forwards transactions.

These actions, the BSP chief said, have existed side by side with a low interest regime by keeping policy rates at record-lows of 3.5 percent and 5.5 percent since October last year due to benign inflation.

 â€œMonetary policy should be focused on ensuring price stability, and macro-prudential tools should be used to manage potential build-up of system risks,” Tetangco explained.

 â€œIn both instances, both policies can be mutually reinforcing such as when they both lean against the business and financial cycles,” he added.

But Tetangco said macro-prudential measures should not be a substitute for “warranted” structural adjustments in most emerging Asian nations to increase absorptive capacity.

 â€œThese reforms are aimed at deepening domestic bond and equity markets, developing financial products in a prudent manner and strengthening financial regulation and supervision,” he said.

At the same time, coordination among economies – between those that are experiencing outflows and receiving inflows – is also important, he added.