[dropcap color=”#dd9933″]T[/dropcap]HE Bangko Sentral ng Pilipinas (BSP) ruled out on Sunday the likelihood of tighter credit, whether in foreign currency or in the local currency the peso, in the near certainty that US monetary policy normalizes and interest rates head north.
Such an event is believed to cause a degree of volatility in the markets when credit is restricted and liquidity is scarce, forcing the monetary authorities here and abroad to make appropriate adjustments.
According to BSP Governor Amando M. Tetangco Jr, there should be no “significant tightening of financial market conditions” as US monetary policy normalizes and interest rates in the world’s largest economy and the country’s biggest trading partner begin to rise.
He said ample liquidity in peso terms, as well as in foreign currency for those requiring financing should not be a problem as the $270-billion economy has bountiful supply of both.
In addition, he said, the BSP is prepared to counter an earlier-than-expected rate hike in the United States.
Tetangco has made it known the BSP is prepared for the uncertainties attendant to US normalization by setting up a “good offense” in terms of disciplined policies and prudent monitoring to “keep the house in order.”
Tetangco said this when sought for reaction on the impact of the minutes of the US Federal Reserve’s (the Fed) July meeting and the increasing likelihood of higher US interest rates down the line.
“There is still considerable uncertainty about the timing and the magnitude of the Fed’s shift into normalization mode. Markets will continue to be highly sensitive to news about key indicators on growth, labor market conditions and inflation,” Tetangco said.
As to how the Philippines will be affected by an early interest-rate hike in the US, Tetangco said that this will primarily impact financial market volatility. He quickly added, however, that there should not be “significant tightening of financial market conditions” due to the ample peso and dollar liquidity in the system.
“Moreover, some counterweight is being exerted by the accommodative monetary policies of the BOJ [Bank of Japan] and the ECB [European Central Bank],” Tetangco said.
Asked on how the BSP is preparing for the early tightening measures of the US, the central bank chief said they are prepared to use the “full menu of instruments” in its tool kit to respond to the “ebb and flow” of capital in the country.
“These include: exchange-rate flexibility, presence in foreign-exchange market [if needed], interest rate action [if needed], liquidity-enhancing contingency measures [if needed], regulatory forbearance, and careful/clear communication to manage sentiment,” Tetangco said.
“These are the same policy responses that we used to stabilize the economy during the peak of the global financial crisis,” he added.
Bianca Cuaresma