PH braces for EU quantitative easing

Bangko Sentral ng Pilipinas. INQUIRER FILE PHOTO

European monetary authorities recently reduced interest rates further and announced a new monetary stimulus package as it sought to reignite the continent’s economy.

Philippine regulators warned that the European Central Bank’s (ECB) move may result in short-term volatility in financial markets, which may force the Bangko Sentral ng Pilipinas (BSP) to shore up the peso to keep it stable.

“This may partially offset the financial market impact of the normalization of US monetary policy. As the US tightening starts and proceeds, US interest rates would have some impact on our financial markets—specifically peso and dollar bonds and, indirectly, our local currency bond,” said Joey Cuyegkeng, economist at Dutch financial giant ING’s Manila branch.

“Offsetting such actions may present a difficult balancing act for emerging market central banks, including our BSP,” he added.

This week, the ECB cut its main lending rate by a tenth of a percentage point to a new record low of 0.05 percent.

It also cut rates on bank deposits, also by 10 basis points, to bring it deeper into negative territory of 0.1 percent. Negative interest rates mean yields that are lower than inflation. This encourages banks to lend to the public instead of parking funds with monetary authorities.

The ECB likewise said it would purchase asset-backed securities from the market, similar to the quantitative easing program of the US Federal Reserve.

Similar to the Fed move, the ECB’s monetary stimulus aims to bring down interest rates in Europe and boost business activity and consumer demand.

The US Fed has started to taper its bond-buying program, and is expected to completely halt these purchases by October this year as the American economy continues to improve. The Fed’s move, which mops up liquidity from international markets, may be partially offset by the ECB’s new plan, Cuyegkeng said.

For his part BSP Governor Amando M. Tetangco Jr. said the ECB move, which weakened the euro against the dollar, could lead to a depreciation of other currencies, including the peso.

“We could see portfolios further rebalance towards the US dollar,” Tetangco said. “However, as our own fundamental story remains intact, we don’t expect significant outflows as a result of the latest ECB action.”

Over the medium term, the ECB move, if it turned out to be successful in boosting Europe’s economy, should help calm global financial markets.