BSP welcomes US Fed move to keep rates low
MANILA, Philippines—The Bangko Sentral ng Pilipinas has welcomed the move of the US Federal Reserve to keep its policy rate at historic low, shrugging off potential consequences of a sustained surge in foreign hot money.
BSP Governor Amando Tetangco Jr. acknowledged in an interview that record low US interest rates would attract more foreign portfolio funds to emerging markets like the Philippines, which will likely yield a higher return.
This surge is a cause for concern because too much inflow of foreign hot money causes the peso to strengthen or appreciate, thus putting exporters at a disadvantage.
However, Tetangco said the move of the US Fed is necessary to help keep the world’s biggest economy sustain a recovery from the recent recession.
“On one hand, it [low US interest rate] can cause a continuation of capital flows to emerging markets. On the other, there is a need to support the US economy,” Tetangco said.
“A US economy performing better is good for the global economy,” Tetangco added.
Low interest rates help prop up an economy as these beef up demand for bank loans, which in turn helps boost consumption and investments.
The Philippines’ economic performance is greatly influenced by the US economy as the United States is one of the biggest export markets for Philippine-made goods.
It is also home to many overseas Filipino workers, whose remittances help boost consumption in the Philippines.
The recent move of the US government to inject money into its economy and to keep interest rate at a record low (at zero to 25 basis points) has created a stir among policymakers worldwide.
Some governments of emerging markets, which saw a rise in foreign hot money inflows and rising currencies as consequences, earlier complained against the policy stance of the United States.
The US government, however, said it was keen on sustaining recovery of the US economy.
Hot money inflows to the Philippines surged last year to $4.6 billion from only $388 million the previous year, thus propping up the peso.
Tetangco said that this time, however, there may be fewer complaints against low US interest rates.
He said the move of some European central banks to raise key interest rates would somehow temper the surge in foreign hot money inflows to emerging markets like the Philippines.
“I don’t think there will be another currency war [heated arguments between emerging markets whose currencies are rising and low rates in rich countries],” Tetangco said.
