The latest signals from the US Federal Reserve (the Fed) has given the Bangko Sentral ng Pilipinas (BSP) sufficient space to keep the policy rates at current levels pending more compelling data that warrant a policy shift.
But very quickly, BSP Governor Amando M. Tetangco Jr. expressed apprehension the absence of clear indications as to the timing of the policy shift could only cause more volatility in the local financial markets.
Soon after US Fed Chairman Janet Yellen testified in Congress, Tetangco said the US central bank chief’s comments at the legislative inquiries could impact the Philippines in two ways.
“While the Fed statement gives the BSP room to keep rates steady, recent price action shows we must be mindful that the comments could also spur more market volatility. This increase in volatility bears watching,” Tetangco said in a text message to reporters on Thursday.
Tetangco said this pertained to Yellen’s use of language, particularly on the markets’ interpretation of the word “patient” to mean no rate increase for at least two US Fed meetings as inflation continues to be low and that labor conditions have yet to improve.“The committee judged, in December and January, that it can be patient in beginning to raise the federal funds rate. This judgment reflects the fact that inflation continues to run well below the committee’s 2-percent objective, and that room for sustainable improvements in labor market conditions still remains,” Yellen had said.
“The Federal Open Market Committee’s (FOMC) assessment that it can be patient in beginning to normalize policy means that the committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” she added.
Tetangco said this points to a US Fed preference to anchor any policy decisions down the line on compelling data rather than a particular day or week in the calendar. In that period when the US Fed scans the economic landscape for the trigger data to appear, yield-hungry portfolio funds could opt to stay invested in emerging-market economies (EMEs) as to the Philippines.
“That the Fed chairman comments were not clear on the ‘when’ shows the Fed is continuing to veer away from calendar-dependence and reaffirms its data-dependence [stance]. As we saw yesterday [on Wednesday], market received the Fed comments as dovish, and encouraged some “risk on” trades,” Tetangco said. “We may therefore see capital moving further to the long-end of the US curve or to EMEs,” he added. On February 12 when the Monetary Board convened again to determine which way interest rates were headed over the next 18 to 24 months ended with the decision to keep the rates frozen for now.