Monetary officials wary of tapering aftershocks

Monetary officials remain wary of aftershocks from last year’s so-called “taper tantrum” that marked the beginning of the end of ultra-cheap money policies in the US, sending markets in emerging economies into bear territory.

The Bangko Sentral ng Pilipinas (BSP) said that, although financial markets have stabilized, emerging markets remain far from being out of the woods.

“There is still considerable uncertainty about the timing and the magnitude of the US Federal Reserve’s shift into normalization mode,” BSP Governor Amando M. Tetangco Jr. said at the weekend.

“Markets will continue to be highly sensitive to news about key indicators on growth, labor market conditions and inflation,” he said.

Last week, minutes of the latest Federal Open Market Committee meeting showed many senior Fed officials were more hawkish than expected, indicating a possible acceleration in the reduction of monthly asset purchases.

Since the start of the year the Fed has been cutting its quantitative easing program—introduced in 2009 to spur the American economy—to let US stand on its own feet. Quantitative easing involves pumping fresh cash into the US economy through the monthly purchases of long-term US treasuries and mortgage-backed securities.

These asset purchases, coupled with low interest rates, pushed investors to emerging markets like the Philippines where yields are higher.

As these are tapered, investors have started to return to the US due to the promise of improving yields and safer investments.

On the local front, the BSP said that, even as investors flee for safe havens, domestic liquidity conditions would remain stable. Much of the country’s dollar income comes from recurring sources such as remittances from migrants and revenues from foreign exchange-earning industries such as outsourcing and tourism.

Peso liquidity also remains ample as more people start making more money due to the country’s booming economy.

“For the BSP, the best defense is a good offense: Disciplined macroeconomic policies and prudent financial sector oversight will continue to be observed to ‘keep house [the] in order,’” Tetangco said.

Should conditions turn sour, he said the BSP would resort to the same tools that were used during the 2008 global financial crisis.

These include exchange rate flexibility; central bank presence in the foreign exchange market; interest rate action; liquidity-enhancing contingency measures; and clear and careful communication to manage market sentiment.