US Fed decision to slow peso weakening

The Bangko Sentral ng Pilipinas (BSP) Thursday kept key policy rates unchanged although it slightly cut its inflation forecast for 2016 to 1.7 percent amid expectations the rate of increase in prices of basic goods would remain manageable in the near term.

Also, BSP Governor Amando M. Tetangco Jr. said the weakening of the peso seen in the past few days would slow as markets react to less uncertainty following decisions made by monetary authorities in Japan and the United States.

After the Monetary Board’s meeting, Tetangco told reporters that the decision to keep the policy rate or the overnight reverse repurchase facility at 3 percent was based on the assessment that the inflation environment remained manageable.

The BSP’s highest policy-setting body has maintained key rates steady since September 2014.

“Latest forecasts continue to indicate that average inflation will likely settle slightly below the 2-4 percent target range in 2016 and rise toward the midpoint of the target range in 2017 and 2018,” Tetangco said.

BSP Deputy Governor Diwa C. Guinigundo said the central bank had brought down the yearend forecast from 1.8 percent previously due to lower inflation in August of 1.8 percent, and as the impact of election spending and the rainy season were expected to set in during the third quarter.

Guinigundo said inflation forecasts for 2017 and 2018 remained at 2.9 percent and 2.6 percent, respectively.

According to Tetangco, “the Monetary Board recognized that while global economic conditions have remained subdued since the previous meeting, trends in domestic economic activity showed sustained firmness, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity.”

“Given the fiscal space, higher public spending is also expected to further boost domestic demand,” the BSP chief said.

“With these considerations, the Monetary Board believes that current monetary policy settings remain appropriate,” Tetangco said.

With regard to the US Federal Reserve’s decision to keep rates unchanged, Tetangco said: “The Fed’s holding off further action shows it can be a little bit more patient. For our markets, this may mean that we could possibly see some slowing in the weakness of the peso in the near term until the next Fed meeting. It may even encourage very short term trades to squeeze some more juice from the carry. We will monitor developments to see for any excessive market reactions.

Tetangco explained that more than domestic developments, external factors weakened the peso in recent days.

“The recent weakness in the peso has been due to a number of factors. In the last two weeks, the European Central Bank, Bank of Japan and the Fed held policy meetings. It is normal price action that in the run up to these meetings, volatility heightens and markets become defensive and take profit on positions. Of particular interest relative to the peso is the Fed action. Last night, it kept its target funds rate steady. With that uncertainty gone for now, we can expect a slowing of peso weakness, which we did in today’s market,” Tetangco said.

“There are also sociopolitical factors. But in those, it is important to remember that the economy has sound macro fundamentals that have been built on strong institutions. We are following a flexible exchange rate policy where the rate is allowed to be broadly determined by the market but official action may be taken if volatility is excessive,” Tetangco added.