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Central bank sees weaker peso on Fed




Posted on May 05, 2017


PHILIPPINE POLICY makers have no reason to adjust borrowing rates too soon despite hawkish comments from the Federal Reserve, central bank officials said yesterday even as they flagged the likelihood of a weaker peso given optimism over the US economy.

BSP Governor Amando M. Tetangco, Jr. said the Fed’s latest decision will be factored in during next week’s policy review by the BSP, but said that it was “not sufficient” to disanchor the central bank’s inflation expectations at present. -- BW FILE PHOTO
The US Fed kept interest rates steady during its May 2-3 meeting as it grew confident that the weak US economic growth seen during the first quarter is “transitory,” while hinting that the central bank is still on track with two more hikes this year.

US gross domestic product expanded by 0.7% during the first three months of the year, while job growth slowed in March.

This week marked the first review since the Fed’s 25-basis-point increase in March. Some traders are now eyeing a second hike for the year during the Fed’s June 13-14 meeting, Reuters said in a report.

The Bangko Sentral ng Pilipinas (BSP) sees the Fed’s bullish comments as a plus for the local economy and the stock market, although some short-term tumult may be seen in the foreign exchange market.

“The Fed downplayed as transitory and qualified the weakness in economic data. Medium term, this bodes well for trading partners of the US,” BSP Governor Amando M. Tetangco, Jr. said in a text message to reporters.

“In the near term, that the Fed is seen to remain on track for gradual tightening should be generally good for financial market volatility as markets have already priced-in the two rate hikes. This may, however, lead to some small depreciation pressure on emerging market economies’ currencies as the dollar strengthens.”

The peso opened at P50 versus the greenback immediately after the Fed’s remarks, but settled at P49.87 by the end of Thursday’s session, even stronger than its P49.95 finish the previous day.

Mr. Tetangco said the Fed’s latest decision will be factored in during next week’s policy review by the BSP, but said that it was “not sufficient” to disanchor the central bank’s inflation expectations at present.

The BSP expects inflation to remain manageable over the next two years, though it is seen heading further north until the third quarter

Still, the full-year average will likely fall within the 2-4% target band.

Inflation has averaged 3.2% during the first quarter, on track to hit the 3.4% estimate for the year as of the Monetary Board’s March 23 meeting.

“LITTLE BASIS”
BSP Deputy Governor Diwa C. Guinigundo said policy makers are still largely focused on domestic developments in deciding on interest rates, thus leaving enough space to remain on hold during their meeting next week.

“Conduct of monetary policy in the Philippines certainly gives some weight to interest rate dynamics in the US and other advanced economies. But the major driver of policy is our idiosyncratic factors,” Mr. Guinigundo said in a separate text message.

“We have sufficient liquidity in the market, credit growth remains robust, consistent with the growth requirements. In sum, given the data available to us at this point, there is very little basis for deviating from current policy, as suggested by Governor Tetangco recently.”

The BSP has kept its monetary policy stance unchanged for 20 straight meetings since a hike in September 2014, except for procedural cuts to the benchmark rates introduced in June last year for a shift to an interest rate corridor scheme. -- Melissa Luz T. Lopez