Economy can absorb any policy adjustment – BSP

MANILA, Philippines - The economy will be able to absorb any adjustments in monetary policy settings as potential capacity has already gone up, a Bangko Sentral ng Pilipinas official said.

“If it is necessary to adjust your policy rate upwards, your economy can absorb this... because your economy can grow by seven to eight percent,” BSP Deputy Governor Diwa c. Guinigundo said over the weekend.

The same can be said for macroprudential measures the BSP may implement as the economy’s potential growth has already risen to six to eight percent from the previous four-to five-percent expansion seen in the past,Guinigundo said at the annual Economic Journalists Association of the Philippines-San Miguel Corp. seminar.

Monetary authorities last month kept key policy rates steady but hiked the banks’ reserve requirement ratio by one percent to mop up excess liquidity in the system.

The move was seen by analysts as the start of a monetary tightening cycle, following recent US Federal Reserve actions that signal higher interest rates may materialize sooner than expected.

Guinigundo explained the BSP has room to adjust policy given the manageable inflation which has stayed within target and the strong economic growth that reached 7.2 percent in 2013.

But he stressed this “elbow room” is decreasing as the US Fed quickens the pace of its reduction in massive monthly asset purchases.

“The pace of reducing its stimulus is getting faster and the faster it gets, the faster will be the period for the US Fed to think about the normalization of its interest rates,” he said.

“If the Fed hiked interest rates and the BSP wasn’t able to adjust accordingly, the Philippines may continue to see sustained capital outflows and a weakening peso that may threaten the financial stability,” Guinigundo pointed out.

“From a strategic point of view, monetary policy will have to take in what the other countries are doing particularly the US Fed and adjust accordingly,” he added.