Bangko Sentral ng Pilipinas Amando M. Tetangco Jr. said the BSP would have to continue its mopping up activity until the economy grows enough to build up absorptive capacity.
The BSP eased its policy rates by 25 basis points earlier this month but kept its special deposit account (SDA) facility open to keep siphoning off excess liquidity in the wake of strong foreign exchange inflows.
“There is a timing mismatch here,” Tetangco explained. “Inflows come into the country but absorption takes time. The economy would have to build up the capacity to do this.”
In the meantime, Tetangco said the BSP would have to manage the impact of these inflows on domestic liquidity. “That’s why we are mopping up,” he said.
The BSP had expected the reduction in its policy settings to have a mitigating impact on capital inflows which would slowdown the inflow of foreign investments and ultimately prevent the peso from appreciating rapidly.
Instead, however, inflows actually surged after the policy rate cut, bolstered by remittances from overseas Filipino workers (OFWs) and inflow to the equities market due to new listings.
Data from the BSP showed that the total inflow of foreign portfolio investments hit $930.01 million in September but the bulk of these funds flowed right out, a net inflow of $38.21 million.
The September performance brought the total net portfolio investments for the first nine months of the year to $3.4 billion, a two-fold increase compared with the $1.4-billion net inflow over the same period last year.
According to Tetangco, the local financial market needs to watch out for further increases in global liquidity with the distinct possibility of a slowdown in the US economy.
Tetangco explained that this slowdown could trigger another round of monetary easing from the US Federal Reserve Board which could again raise liquidity which would eventually find its way into the country’s financial market.