Bangko Sentral ng Pilipinas said Thursday the possibility of an interest rate hike by the US Federal Reserve in December will generate more financial market volatility and may force policy makers to review economic targets.
Bangko Sentral Deputy Governor Diwa Guinigundo said monetary authorities were monitoring developments overseas because of their impact on the domestic financial markets.
He said the imminent interest rate hike by the US Fed would be a major factor to consider in the review of the country’s economic targets this year.
“We have to consider the forthcoming US Fed lift-off which could generate some financial market volatility. Vigilance is critical,” Guinigundo said in a text message.
The US Fed, in its meeting in September, kept interest rates unchanged but hinted of a possible rate hike before the end of the year.
Guinigundo said earlier the Fed’s September statement would create further uncertainties in the global financial markets that could affect local financial markets.
The Philippine peso depreciated by 5 percent since the start of the year while stocks dropped 5.6 percent in the same period, because of the market volatility.
Guinigundo said Bangko Sentral was “still reviewing our external payments position.”
The Bangko Sentral reviews its economic projections twice a year—in May and October. It targets $81.6 billion in gross international reserves, a surplus of $2 billion for balance of payments, $6-billion net inflow of foreign direct investments, $1.4-billion net inflow of foreign portfolio investments and a 5-percent growth in remittances this year.
Meanwhile, Bangko Sentral Governor Amando Tetangco Jr. said the bank was studying the possibility of increasing its holdings of Chinese currency in foreign exchange reserves amid the growing use of yuan in the global financial transactions.
“That is clearly an option for the BSP in its efforts to diversify the foreign currency composition of its reserves and to enhance its yields on foreign exchange assets,” Tetangco said at the sidelines of the Asia Pacific Economic Cooperation Summit in Manila.
“We will of course have to understand how the domestic market works in China so that we’d be in a better position to make decision,” Tetangco said.
Tetangco said the Philippines’ investments in the renminbi were mainly through the Executives’ Meeting of East Asia-Pacific Central Bank Asian bond and the BIS China fund. Both EMEAP and BIS have access to the onshore bonded foreign exchange markets.
“We have some investments in the RMB which have been made in the offshore market of Hong Kong,” Tetangco said.
He said that after the People’s Bank of China liberalized policies and regulations on investment in onshore market, Bangko Sentral would definitely “consider that and make a decision on how we need to move forward at that point.”
He said the possible inclusion of the renminbi in the special drawing rights basket of the International Monetary Fund was expected to increase the use of the Chinese currency in the global financial transactions.
“I think this will lead to some portfolio rebalancing by investors and there may be likely an increase in the demand for renminbi,” Tetangco said.
Tetangco also said that the Philippines, on a broader perspective, could look at renminbi as a medium of settlement of trade transactions with the growing trade between the Philippines and China.