BSP to keep accommodative policy to aid recovery

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THE PHILIPPINE central bank will continue to keep its accommodative policy to support the economy’s recovery, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said on Thursday.

“Given the manageable inflation outlook, and with non-monetary government measures helping to ease some of the supply-side pressures, the priority for monetary policy remains in keeping stimulus in place to aid the recovery,” he said at a briefing.

The BSP has maintained policy rates at record lows in its September review, even as it raised inflation outlook further beyond target to 4.4% for 2021.

Inflation in September eased to 4.8%, although still above the 2-4% BSP target. October inflation data will be released by the Philippine Statistics Authority on Friday.

“Nevertheless, the BSP stands ready to respond to potential second-round effects from supply-side factors as well as to more broad-based inflation pressures as the economy makes a full recovery,” Mr. Diokno said.

Third-quarter gross domestic product data will be released on Nov. 9, while the BSP will have its next policy review on Nov. 18.

At the same time, Mr. Diokno said the central bank will monitor the near-term impact of the US Federal Reserve’s move to unwind its massive stimulus program.

“With a gradual shift of major central banks toward normalization, including the recent US Fed announcement on the tapering of asset purchases, monetary authorities will be closely monitoring the near-term impact on financial conditions,” he said.

“The BSP is of the view that the Philippine economy will continue to recover in an environment of tighter global financial conditions,” he added.

The central bank chief stressed the flexible exchange rate system “serves as the country’s first line of defense against global shocks supported by robust external payments position.”

Mr. Diokno added the country’s huge gross international reserves (GIR) will also serve its purpose as a buffer against potential external shocks.

The country’s GIR stood at $106.6 billion as of end-September, 1.3% lower than the $107.96 billion as of end-August.

Still, this level is enough to cover 7.7 times the country’s short-term external debt based on original maturity and 5.3 times based on residual maturity. It is also equivalent to 10.7 months’ worth of imports of goods and payments of services and primary income.

Meanwhile, analysts believe the Fed’s tapering asset purchases may put more pressure on the peso.

“A sustained decline in portfolio inflows specially in fixed income will likely exert further pressure on the peso and make inflationary expectations even more de-anchored,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said in a Viber message.

“This could mean stronger dollar. Definitely, Asian currencies are going to be affected, including the peso, could depreciate,” UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in a phone call.

The peso has been depreciating in the previous months. At its close of P50.595 per dollar on Thursday, the local unit has weakened by P2.572 or 5.36% from its P48.023 finish on Dec. 29, 2020.

Still, analysts said another taper tantrum similar to the one in 2013 is unlikely. In 2013, the taper tantrum resulted in panic over rising credit costs which led to sharp outflows from emerging markets and pushed central banks to hike interest rates.

“The problem before [in 2013] was the communication of the policy. This time, there’s much talk about it and the Fed has been more transparent so I think the market has adjusted carefully,” Mr. Asuncion said.

Mr. Asuncion said the market has already gradually priced in the taper as the Fed has hinted about it in the previous months. He noted this was reflected in the uptick in yields as seen through the PHP Bloomberg Valuation Service Reference Rates in previous weeks.

“Tantrum is unlikely in the short term as the Federal Open Market Committee announced a mild taper and absence of an immediate rate hike,” Mr. Neri said.

“We foresee the possibility of a tantrum later as a more aggressive policy action may be necessary for most central banks to tame what is likely to be a more persistent rise in prices caused, in large part, by their delayed normalization,” he added. — Luz Wendy T. Noble

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