BSP treading carefully as US poised to raise interest rates

MANILA, Philippines - The Bangko Sentral ng Pilipinas said it is treading carefully as markets brace for a rise in interest rates in the US, which could lead to massive capital outflows from the Philippines.

“We have to be very careful in terms of monetary policy. While it’s true that inflation is trending downwards, we have to weigh this relative to the expected tightening of US monetary policy,” BSP Deputy Governor Diwa C. Guinigundo said.

“If there is a severe reaction to the US tightening, some cross-border outflows of capital can ensue. That can influence demand for dollars,” Guinigundo said.

The US Federal Reserve last month signaled interest rates may start rising this year although Fed chairman Janet Yellen said rates would remain near-zero for “at least a couple of meetings.”

The US central bank, after the global financial crisis of 2008, kept rates near-zero and started buying massive quantities of assets to boost economic growth and stabilize the financial system.

The Fed started decreasing the value of its monthly asset purchases in January last year and finally ended the stimulus in October.

The BSP’s policy-making Monetary Board has kept key rates steady in October and December last year after hiking the overnight borrowing and overnight lending rates for two consecutive meetings earlier.

The decision to leave key rates unchanged was due to inflation expectations falling within the target ranges for 2014 until 2016.

Inflation last year peaked between May and August but improvements in supply conditions and declining oil prices have helped lower the rate and keep it within the three- to five-target range for 2014.

Inflation averaged 4.1 percent last year, and the central bank expects this to ease further to just three percent this year, well-within the two- to four-percent goal for 2015 and 2016.

“The decline in oil prices gives us more room in monetary policy,” Guinigundo noted.

The Monetary Board will revisit policy settings next on Feb. 12.

Last year, the BSP has also hiked the banks’ reserve requirement ratios and the Special Deposit Account rate in order to rein in excessive liquidity growth.

Latest data showed M3—the broadest measure of domestic liquidity—expanded by only nine percent to P7.304 trillion in November, slower than the 15.4 percent in October and the 16.2 percent in September.

M3 growth hit 30 percent in July 2013 and remained above that level for another nine months following a 150-basis point reduction in the SDA rate in early 2013 and the restriction of investment management accounts or singular fund accounts offered to retail investors in the same facility.

“It has gone down. One explanation is base effects, while the other is there was also some mopping up from the previous monetary policy moves,” Guinigundo said.