BSP ready for negative effects of Fed action

MANILA, Philippines - The Bangko Sentral ng Pilipinas said it stands ready to deploy policy measures to counter any negative impact on domestic prices of US Federal Reserve action to end its bond buying program.

BSP Governor Amando M. Tetangco Jr. made the comment after minutes of the Fed’s meeting on June 17 to 18 published last week showed that officials agreed the massive monthly asset purchases meant to pump money to the US economy would end in October.

“We have a full array of tools at our disposal. We have the monetary policy space to help guide inflation expectations so that our inflation target is not at risk,” Tetangco said in an e-mail to reporters.

Although the Fed minutes did not give any guidance when the first interest rate hike may occur, the decision to make the final reduction in asset purchases currently at $35 billion a month later this year if the improvements in the labor market continues and as inflation moves toward the target.

Tetangco stressed that the BSP has been considering the Fed’s policy actions in its own rate-setting meetings as these affect capital flows to the country and trade activity, in general.

“We include the Fed’s actions as an input in our policy making to the extent that these affect global investor sentiment, and therewith capital flows; and these reflect economic growth prospects in the US, and therewith the strength of our trade flows and that of other trading partners,” Tetangco said.

He added the latter is also seen having an impact on international commodity prices, which could affect domestic inflation.

“It’s important to understand that it would not be prudent to put the Fed program on a pre-set course,” Tetangco said.

“There are after all too many moving parts in the decision tree. This is why at the BSP, our actions are primarily guided by how our own inflation path would evolve over our policy horizon,” he explained.

Inflation has so far averaged 4.2 percent as of June, above the midpoint of the BSP’s three to five percent target range. However, monetary authorities during its last policy meeting on June 19 kept key rates steady as inflation expectations remain within target.

“Our recent runs show that inflation over the policy horizon would still be within the government’s target range, albeit elevated, with the full year averages above the midpoint of the target range,” Tetangco said. 

“We need to carefully monitor, among others, if second round effects are forming, if geopolitical risks would create heightened volatility in commodity prices (particularly oil), how global investors would rebalance portfolios as this would affect capital flows and domestic bond prices/the peso/dollar rate,” he said.