Latest Fed policy move seen positive for PHL

SIGNALS of an improving outlook for the United States economy are positive for emerging markets like the Philippines since they point to better global growth prospects in the coming months, allowing local monetary authorities to keep policy stable, the chief of the Bangko Sentral ng Pilipinas (BSP) said yesterday.

The US Federal Reserve kept interest rates steady during its July 26-27 meeting but hinted at a possible hike in the coming months as risks to the near-term outlook have "diminished." Fed chair Janet L. Yellen said the US economy has expanded at a moderate pace, while job creation rebounded in June following May's low turnout.


Back home, the BSP said emerging markets stand to gain from the Fed's more "hawkish" statement, as a sustained recovery of the US economy could uplift global growth.

"The markets have viewed the Fed statement to be more hawkish than they had anticipated. With the assessment that near-term risks to the economic outlook have diminished, analysts see that there could be a (US monetary policy) move as early as September although the statement did not strongly point towards one," BSP Governor Amando M. Tetangco, Jr. said in a text message to reporters.

"That assessment should be overall positive for EMEs (emerging market economies) including the Philippines, as it reflects a move towards normalization, and that the US will indeed be another post for global growth going forward."

The Fed has held steady on rates since December, when it raised them for the first time in nearly a decade and signaled another four rate increases were in the offing for 2016. That was scaled back to two hikes this year after central bank policy makers issued new projections in which they also lowered their longer-term growth estimates for the US economy. A global economic slowdown, financial market volatility and uncertainty over the impact of Britain's June vote to leave the European Union have repeatedly forced the Fed to delay another rate increase. Observers noted, however, that the Fed's latest risk assessment opens the door to a resumption of monetary policy tightening this year.

In its World Economic Outlook Update released earlier this month, the International Monetary Fund (IMF) said indicators pointed to a pickup in the US' growth momentum for the rest of the year despite a slower-than-expected climb in the first quarter. The multilateral lender expects the world's biggest economy to grow by 1.8% this year, a tad slower than a previous 1.9% estimate.

The IMF also scaled down its global growth forecast to 3.1% this year and 3.4% the next, citing weaker prospects for advanced economies like the US, the Euro area, and the United Kingdom following the latter's decision to leave the European Union.

Mr. Tetangco said the BSP has enough leeway to keep monetary policy settings unchanged despite external headwinds.

"[T]his would still not be reason enough for us to change the stance of monetary policy. The outlook for domestic inflation remains well-anchored and domestic demand continues to be solid," the BSP official said.

The central bank steadied monetary policy in its June 23 meeting, following a June shift to the interest rate corridor that entailed procedural tweaks to key rates last month. The Monetary Board kept key rates steady at 3.5% for the overnight lending rate, 3% for the overnight reverse repurchase rate, and 2.5% for the overnight deposit rate that took effect June 3.

Philippine inflation averaged 1.3% last semester, well below the government's 2-4% 2016 target band but is expected to creep up in the coming months to hit a 2% full-year average.

Source: Business World Online