Rather than clearing the air, US Federal Reserve chair Janet Yellen’s comments this week muddled matters more, putting local policymakers on edge.
Central bank Governor Amando M. Tetangco Jr. on Thursday said the US Fed’s “dovish” tone on interest rates this week may be good for emerging markets in the short term.
Investors seeking higher yields may more boldly keep their money in riskier assets, such as those in emerging markets like the Philippines.
But further down the line, these placements will eventually be withdrawn, causing more volatility in markets as fund managers rethink the makeup of their portfolios.
“This increase in volatility bears watching,” Tetangco said in a statement to reporters.
Speaking before lawmakers this week, Yellen refused to give a clearer timetable on the US Fed’s rate adjustments, which promises to shift global investor sentiment toward the American economy.
Following Yellen’s statements, the peso rose to a multiweek high on Wednesday, and continued to rally on Thursday, closing at 44.075 against the greenback from 44.12:$1 the day before.
“(The) market received the Fed comments as dovish, and encouraged some ‘risk on’ trades,” Tetangco said.
Investors now are expected to either favor longer-term assets to protect themselves from uncertainty, or use the window of time provided by the Fed’s foot-dragging to earn more by keeping money in emerging markets, the BSP chief added.
Once the Fed hikes rates, foreign investors may flock to the US as they chase higher yields. Hiking interest rates in the Philippines may mitigate effects of this mass repatriation, keeping the peso stable.
Earlier this week, Tetangco said stable inflation—a result mainly of cheap fuel—enabled the Bangko Sentral ng Pilipinas (BSP) to keep key rates steady for most of 2015.
Tetangco said the Monetary Board was willing to adjust its benchmark rates in any direction—up to keep in tandem with the Fed, or down to fend off “disinflationary” pressures.
The BSP expects consumer prices to move up by an average of 2.3 percent this year, which is near the low end of the target band of 2 to 4 percent.
Last year, inflation stood at 4.1 percent. In January, inflation slowed to 2.7 percent, while February’s reading is projected to fall between 2.2 and 3 percent.