The Philippine central bank is preparing for whatever its counterpart in the United States may dish out in the coming months, wary of the volatility any action may cause in the financial markets.
US Federal Reserve kept policy settings on hold this week, and gave little in the way of hints on plans of the so-called “lift-off”—the first hike in interest rates since the 2008 Global Financial Crisis.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the US Fed’s assessment on the strength of the American economy was good for trading partners like the Philippines. However, the effects of the US Fed’s expected rate hike may still hound the domestic economy.
“We will take the Fed’s views into consideration during our policy meeting,” Tetangco said. The BSP’s policymaking Monetary Board will meet to determine interest rate settings next week.
Tetangco’s concerns follow spells of financial market volatility faced by emerging markets following past adjustments made by the US Fed.
In 2013, after the US Fed hinted at halting large cash infusions into the American economy to allow interest rates to rise, markets in emerging economies like the Philippines were hit by the so-called “Taper Tantrum.” This sent borrowing costs up, and stock market valuations and currencies down.
An adjustment in Fed rates in the coming months may create a repeat of 2013, Tetangco warned as he urged market players to be more mindful of their own moves.
“The Fed’s consistency in its message should provide some market calm, but it should also encourage the market to be watchful of developments and avoid extreme actions,” he said.
The BSP adjusts interest rates and other liquidity management tools to manage domestic demand, in line with its mandate to protect the consumers’ purchasing power by keeping prices stable.
Overnight borrowing and lending rates set by the BSP stand at 4 and 6 percent, respectively. Cutting rates would spur domestic demand, but turn off foreign investors due to lower yields. The reverse would help stem excessive demand, but make the Philippines more attractive to foreign capital.