Decisive US Fed seen ending wild market swings

PHILIPPINE financial market conditions could be calmer in the coming weeks following statements by the US Federal Reserve carrying more certainty over an interest rate adjustment before the year ends.

Bangko Sentral ng Pilipinas Governor Amando M. Tetangco said a more decisive US Fed could spell the end of extreme market swings in the near term, benefiting small “price-taking” countries like the Philippines.

Speculations of rate adjustments by the BSP itself are back as the regulator is expected to ensure that Philippine monetary policy settings are kept in step with global financing conditions.

The BSP may be “looking to narrow its interest rate corridor ahead of Fed policy normalization,” Bank of the Philippine Islands (BPI) economist Nicholas Mapa said in a note to clients on Thursday.

He said the BSP might choose to cut its main overnight borrowing and lending rates to trim the difference with other policy levers and enhance the potency of monetary settings.

This comes amid plans of the BSP to change the way it manages monetary settings in the country.
BSP Governor Amando M. Tetangco Jr. said the BSP would shift to the use of a so-called interest rate corridor by next year.

In theory, the new corridor system would allow the BSP to better react to policy shifts in major countries like the US.

The BSP’s main role is to protect consumers’ purchasing power by keeping prices stable. This is achieved through adjustments in the cost and amount of money circulating in the economy.

The US central bank kept interest rates steady at the end its two-day policy meeting this week. “The Fed didn’t anymore seem to be as concerned as it was last meeting with the impact of external developments on their own domestic dynamics, as well as the impact of their policy actions on global financial markets,” Tetangco said.

“In a way, this could signal that extreme market reactions are no longer expected, and that they expect more normalcy. This should be market-positive,” he added.

Tetangco said the BSP would monitor the market’s reaction and make adjustments to policy settings as need arises.

“As we are essentially a price taker in the scheme of things, we will continue to monitor domestic market reactions, to see if any action is needed on our part to contain undue market volatility,” he said.