Despite US Fed decision, BSP keeps interest rates unchanged

MANILA, Philippines – Despite the US Federal Reserve (US Fed) decision to raise interest rates, the Bangko Sentral ng Pilipinas (BSP) kept the monetary policy settings unchanged.

BSP Governor Amando Tetangco Jr said on Thursday, December 17, that the central bank’s Monetary Board decided to keep interest rates steady amid the firm domestic demand conditions and benign inflation environment. 

This is the 10th straight policy-setting meeting since October last year that the BSP has decided to keep policy rates untouched. (READ: BSP leaves interest rates unchanged since October)

The BSP's key policy rates were unchanged at 4% for the overnight borrowing or reverse repurchase (RRP) facility and 6% for the overnight lending or repurchase (RP) facility. 

RRP is the interest rate on the RP transaction, typically contracted between the BSP and banks. RRPs may also have overnight or term maturities.

The special deposit accounts (SDAs) or fixed-term deposits by banks and trust entities of BSP-supervised financial institutions were also kept steady.

The reserve requirement ratios were likewise left unchanged.

Interest rate is a tool used by the central banks to balance economic activity. On one end, there is the danger of inflation, or the rise in prices of the goods and services. On the other end, there could be an economic slowdown if interest rates remain high. (READ: The interest rate and you)

Inflation factor

BSP’s decision was based on its assessment of inflation dynamics and the risks to the inflation outlook over the horizon.

Inflation kicked up to 1.1% in November from a record low 0.4% in October due to a spike in food prices. This brought the average inflation to 1.4% in the first 11 months of 2015, way below the BSP target of 2% to 4% for this year.
 
Potential upside pressures could come from the impact of prolonged El Niño dry weather conditions on food prices and utility rates, plus pending petitions for power rate adjustments, while downside risks could arise from possible slower-than-expected global economic activity, Tetangco said.
 
Monetary authorities also observed that domestic demand conditions are likely to stay firm, supported by solid private household and capital spending, buoyant market sentiment, and adequate domestic liquidity.
 
For his part, BSP Deputy Governor Diwa Guinigundo said monetary authorities adjusted its inflation forecasts for 2016 and 2017 due to the higher inflation in November, the impact of the weakening peso against the US dollar, and the increasing price of key commodities due to weather disturbances.
 
The BSP’s Monetary Board raised its inflation forecast to 2.4% instead of 2.3% for 2016 and to 3.2% instead of 2.9% for 2017. Inflation forecast was maintained at 1.4% for this year.
 
Meanwhile, Fitch Ratings associate director for sovereign ratings Mervyn Tang said the external finances of the Philippines is a key credit strength as the debt watcher maintained a positive outlook on the country.
 
“In Fitch’s view, steady current account surpluses since 2002 have led to a large build-up in foreign exchange reserves and that makes the Philippines more resilient than many other emerging market economies to any shift in global investor sentiment, following the (US) Fed rate hike,” Tang said.
 
Fitch upgraded the country’s credit rating to BBB-, equivalent to minimum investment grade in March last year.

Ending uncertainty

Tetangco said the BSP considered the potential impact of the recent monetary policy adjustment in the US on global financial conditions.
 
“... Keeping monetary policy settings steady at this juncture would allow the BSP some room to continue to assess evolving global economic conditions and calibrate its policy tools as appropriate,” the BSP chief said.

The US Fed hiked interest rates by 25 basis points, signaling that the US economy had recovered. (READ: US Federal Reserve raises interest rates)

Tetangco said in a text message that the action of the US Fed brings an end to the liftoff uncertainty.

“The Fed's statement should anchor confidence on the path of growth and inflation in the US," he said.

Tetangco added that the US yield curve may flatten, which would be positive for emerging market economies that have exposures in the long end of the curve or are planning to tap this sector for funding.

The BSP chief said regional currencies have already moved lower versus the US dollar in recent weeks.

“This may continue, as would the outflows, but possibly not in significant magnitudes as in the past. The US Fed promised gradual hikes,” Tetangco said.

The gradual rate hikes would be moderated as the US enters an election year.
 
“That said, on balance, the US Fed action should be constructive for emerging market economies,” Tetangco said.

PH is a resilient economy

For his part, Finance Secretary Cesar Purisima said the government is confident that the Philippine economy is resilient from increased rates.

"As we have long watched this development closely, (Wednesday's) liftoff will not change our financing plans," he said.

Purisima added the country's borrowing costs will continue to narrow because of positive investor sentiment on the back of good fundamentals.

And if a liftoff is any indication of a stronger US recovery, this bodes well for the Philippines, he said, as the US is the country's second largest trading partner as of September 2015 and a top foreign direct investment source as of August this year.

Winners and losers

National Economic and Development Authority Director-General Arsenio Balisacan said the country does not need to worry about the recent increase in benchmark US interest rates, since the Philippines has sound macroeconomic fundamentals.

He added the decision of the US Fed to hike interest rates by 25 basis points is good in the medium- to long-term.

"As an economist, I've been saying that it's better to do this now than later because it's even more painful for a country like us to have this regime of low interest rates, almost zero interest rates," Balisacan said.

He added there are winners and there are losers in the US Fed's decision.

"The losers are those who have not minded their houses over the last couple of years, and that even includes some of our neighbors who have that problem. Fortunately for us, we have learned quite well in the 1997 Asian financial crisis," Balisacan said. – Rappler.com