MACTAN, Cebu , Philippines – The Bangko Sentral ng Pilipinas has intensified its watch on global growth prospects and foreign monetary policy actions to better respond to their impact on the domestic economy.
“Indeed, the ongoing rebalancing of growth across the globe and the expected normalization of monetary policy overseas will require much vigilance on the part of the BSP to help sustain the momentum of the economy,†central bank Governor Amando M. Tetangco, Jr. told the ACI Philippines annual convention here.
“For now, it seems... things remain just right in our economy. As they say, so far, so good. The economy has survived the turbulence of the onset of normalization. But this does not mean, we can afford to let our guard down,†he said.
Tetangco pointed out that there are still “known unknowns†in the global setting which bear watching as this may greatly impact the domestic market.
“Two of these stand out: The timing and magnitude of the reversal of the near-zero target Fed Funds rate or when and how fast will the US Federal Reserve hike rates, and the tendency of markets to go ahead of themselves and how this tendency will be manifested,†he said.
The Fed in January started scaling down its massive monthly asset purchases which it has put in place following the global financial crisis in 2008.
All eyes are now on the gradual decrease of the stimulus, as the eventual end of this is expected to lead to the start of higher interest rates.
The BSP’s policy-making Monetary Board in its last meeting on March 27 kept key rates steady but hiked the banks’ reserve requirement ratio by one percent due to the sustained liquidity expansion.
The Board has always tagged the Fed’s actions as among the factors it has been considering during its policy setting meetings, specifically its possible impact on domestic inflation and economic growth.
Tetangco stressed during the event that the central bank is not “wedded†to any course of policy action as the BSP’s moves largely depend on data.
He enumerated “the most important†key factors the BSP is taking into account at present, topped by the inflation, which is seen to settle within three to five percent this year before slowing to two to four percent in 2015 and 2016.
“While the downward target range is consistent with our assessment that structural changes in the economy could bring about lower inflation, it also means that more vigilance from the BSP is required,†Tetangco said.
“Our forecasts show that inflation over the policy horizon would remain broadly on target. However, the balance of risks to the inflation outlook remains skewed to the upside,†he continued.
Upside risks to inflation include volatility in global commodity prices, and the expected increase in food and utility rates, he said.
At the same time, Tetangco said the BSP is looking at domestic demand and whether the economy will be able to absorb any increase in domestic interest rates.
“Our current assessment is that, the economy is resilient and will be able to withstand some tightness in monetary conditions,†he pointed out.
The Philippine economy grew by a faster-than-expected 7.2 percent last year, sustaining the robust 6.8 percent expansion in 2012. The government hopes to expand the economy by 6.5 to 7.5 percent this year.
The central bank is also keen on looking out for risks coming from the sustained acceleration of domestic liquidity growth, which has remained above 30 percent since July last year.
“There are still limited signs of financial market stresses. But if liquidity growth continues to be strong, even as the inflation outlook stays manageable, we will not hesitate to again consider further pre-emptive macroprudential measures,†Tetangco said.
The last important key factor on the BSP’s radar, the central bank chief said, is the exchange rate movement.