BSP on wait-and-see stance after US Fed maintains key rates

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is in a wait-and-see mode for now as local investors are not expected to react to the United States Federal Reserve’s latest affirmation of low interest rates and continued stimulus.

“Over the medium term, the BSP will take into account the Fed moves and forward guidance on interest rates and asset purchases to see how these affect investor sentiment and flows,” BSP Governor Amando Tetangco, Jr. said in a text message to reporters.

On Thursday, the Federal Open Market Committee— the policymaking body of the US Fed— said in a statement that the US economic recovery has been “modest” and that with “appropriate policy accommodation,” growth is seen to pick up later in the year.

The US Fed, it said, will maintain its near-zero interest rates and “decided to continue” purchasing assets worth $85 billion every month to flood the world superpower with money in order to boost growth and employment.

While most analysts have seen this as “dovish,” Tetangco said investors would likely pause from taking signals from the US Fed for now, and focus more on developments at home, in calibrating their placements. 

At noon break on Thursday, the Philippine Stock Exchange index (PSEi) recovered some losses a day before, closing at 6,677.73, up by 0.58 percent. The peso, meanwhile, averaged at 43.46 versus the dollar as of 1:15 p.m.

“(The Fed’s) re-affirmation of its accommodative policy and reiteration of data dependency of its more specific actions in the interim are not expected to significantly impact domestic markets in the immediate term,” Tetangco explained.

“Our domestic financial markets will likely take more cues from domestic economic news,” he added.

In the third week of June, the US Fed rattled world financial markets when its chief, Ben Bernanke, said it may consider scaling down its bond buying program “later this year” should there be more signs of US recovery.

Bernanke’s statement before the US Congress erased PSEi gains and caused the peso to plummet to 44 to a dollar level at one point, after investors shifted their portfolios back to the US on hopes of rising interest rates.

Since then, the BSP has stood pat on its policy, maintaining key rates at their record-lows of 3.5 percent and 5.5 percent— in place since October— even as rates from Brazil to Indonesia have been raised to attract more inflows and fight inflation.

On Wednesday, Tetangco said policy rates could remain on hold until 2014, as the inflation forecasts that fall within target suggest. On Thursday, he said BSP will “make adjustments… as appropriate.” 

For his part, ING economist Jose Mario Cuyegkeng said the BSP has effectively “shielded” the local economy, which grew by 7.8 percent in the first quarter, from possible drying up of liquidity as a result of US Fed tapering.

In particular, the BSP’s decision to cut the return it offers idle funds on special deposit accounts (SDA) by a total of 150 basis points could flush out liquidity to financial markets and boost economic activity.

“In the near-term, the weight of liquidity flowing out of the SDA will outweigh risks from abroad since that liquidity is going to find a home somewhere,” Cuyegkeng said in a forum last Wednesday.