Emerging markets like the Philippines are bracing for the impact of a possible rate increase by the US Federal Reserve this week, unwinding ultra-loose monetary policy settings put in place in response to the global financial crisis.
Analysts see heightened volatility in financial markets, but economic managers have their eyes set further ahead, expecting a recovery in the US economy to lift domestic conditions.
“There will always be volatility in the face of a Fed rate hike,” Bank of the Philippine Islands (BPI) economist Nicholas Mapa said Monday.
BPI, the Philippines’ third-biggest lender, said yields on government IOUs would likely rise in the coming days as investors seek higher risk premiums. The local currency will also bear the brunt of the impact as it depreciates against the surging US dollar.
This comes ahead of the US Federal Open Market Committee (FOMC) meeting this week. BPI said a rate increase might come this week, or be delayed till December.
Speculation over the US Fed’s move comes months after signals from the American central bank. At the start of 2014, the Fed began reducing monthly purchases of long-term US treasuries and securities backed by US mortgages.
Dubbed as quantitative easing, these bond purchases were done to force interest rates down to give the American economy more room to recover from its worst crisis since the Great Depression. The Fed’s bond-buying program came to an end in October of 2014—a precursor to the coming rate increase.
Economic conditions in the US have also started to improve. Last week, a jobs report showed unemployment in August fell to 5.1 percent, the lowest since April 2008. Gross domestic product (GDP) also grew by 3.7 percent in the second quarter of 2015, better than market expectations.
British bank HSBC said it expected the rate increase coming in December, but a move by the Fed this week could help quell market uncertainty.
“A surprise hike this week… would merely bring this forward by three months,” HSBC economist Trinh Nguyen said in a note to clients.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said a rate adjustment this week would send a clear signal that the US economy, with which the Philippines has strong ties, was on the upswing.
“A hike will provide future guidance on the export sector that US demand will recover,” Guinigundo told the Inquirer. “This should be good news to our merchandise trade, services and capital transactions.”
He said while other emerging market central banks might have to “review” their current positions, the Philippines had already acted preemptively. Last year, the BSP’s benchmark policy rates were raised from record lows by half a percentage point each.
The BSP’s overnight borrowing and lending rates now stand at 4 and 6 percent, respectively.