Looming US rate hike spooks market

MANILA, Philippines - Monetary authorities said the impending interest rate hike by the US Federal Reserve would continue to spook the local financial market as the “normalization” could not materialize before the end of the year.

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the decision of the US Fed to keep interest rates steady last Wednesday was expected due to the scheduled elections on Nov. 8.

“Analysts say the Fed may have set the bar low for a December move.... so if that move does materialize, then it would not come as a surprise to the market,” Tetangco said.

The BSP is set to hold its 7th rate-setting meeting this year on Nov. 10.

“That said, there is a lot to watch out for in the next week. And it’s not likely that markets would make large movements in the meantime. We will continue to monitor developments both external

and domestic, and consider these in our own policy assessment at our meeting next week,” Tetangco said.

BSP Deputy Governor Diwa Guinigundo echoed Tetangco’s sentiment saying the decision of the US Fed to keep rates unchanged was “very much expected.”

The US Fed left interest rates unchanged last Wednesday but strongly signaled it could still tighten monetary policy by the end of the year.

Fed chair Janet Yellen said US growth was looking stronger and rate increases would need to keep the economy from overheating and fueling high inflation.

“Signals the inevitability of rate hikes in the future. May have some short-term transitory pains but over the long run, could lead to more sustainable financial market dynamics,” Guinigundo said.

Yellen said during the meeting of the US Fed there could be one rate increase this year if the job market continued to improve and major new risks did not arise.

The US Fed kept overnight lending between banks in a range of 0.25 to 0.50 percent after raising rates for the first time in nearly a decade last December.

“We cannot have too low interest rates for too long. There could be financial stability risks down the road. Markets misprice risk, take more risks...that’s not good,” Guinigundo said.

The BSP has kept its dovish policy stance since hiking rates by 25 basis points in September 2014. Last June, the central bank made an operational adjustment with the launch of the interest rate corridor (IRC) system aimed at keeping the market rates closer to the policy rates.

It slashed the overnight lending rate (formerly overnight borrowing rate) to 3.5 percent from six percent as well as the overnight reverse repurchase rate (formerly overnight lending rate) to three percent from four percent last June 3.