BSP reviews policy stance

The Bangko Sentral ng Pilipinas (BSP) dropped its dovish tone this week as the peso touched its lowest point since March amid concerns on the recession in Japan, which weighed on regional currencies.

Weakness in other major markets, particularly China and Europe, was raised as a major concern by US Federal Reserve officials. This tone, BSP Governor Amando M. Tetangco Jr. said, was “something to consider.”

“We continue to monitor developments across the globe, as well as domestic investor sentiment, to see if there are changes in market risk assessment,” Tetangco told reporters on Thursday.

Japan’s economy slipped back into recession after a 1.6-percent contraction in the third quarter of the year, official data released this month showed. This added to concerns on global growth following China’s “rebalancing” and the euro zone’s persistent debt issues.

Last month, the International Monetary Fund (IMF) cut its global growth forecast by a tenth of a point to 3.3 percent for 2014, citing disappointing reports by major economies.

Yesterday, the peso closed flat at 45.07 to $1, its intra-day high during the session, after opening at 45.10 to $1 and hitting a low of 45.15:$1. Trading was thin at $465.6 million   from $641.80 million the day before.

Amid potential volatility in markets, Tetangco said the BSP would “determine if there is a need for policy measures to address these.”

Financial market volatility has been fueled by reductions in and the recent halt of the Fed’s quantitative easing program. At the program’s height, the Fed was buying $85 billion worth of US treasuries and mortgages from the market.

Last October, the US Fed announced the long-awaited end to its ultra-cheap money policies as monthly asset purchases that were meant to keep interest rates down were stopped. For its part, the BSP paused from tightening its own policy settings to allow previous interest rate increases and other adjustments to “work their way into the economy.”

Based on the Fed statement released this week, Tetangco said there was no shift in the “balance of views” with respect to the pace of policy normalization in the United States. Earlier, the Fed said it would keep its benchmark rates at their current lows to avoid shocks to the global economy.

An interest rate increase in the US would suck up more money to the world’s biggest economy as investors chase higher-yielding, lower-risk bets. This could result in further outflows of cash from emerging markets like the Philippines, which have been flooded with money in the last five years since the Fed’s bond-buying program began.