Bangko Sentral ng Pilipinas on Thursday kept rates unchanged for the tenth consecutive policy meeting since October 2014, despite the decision of the US Federal Reserve to raise its interest rate for the first time in nearly a decade.
The Monetary Board, the policy-making body of Bangko Sentral, said key policy rates were kept at 4 percent for overnight borrowing and 6 percent for overnight lending.
“The Monetary Board’s decision is based on its assessment of inflation dynamics and the risks to the inflation outlook over the policy horizon. Latest baseline forecasts indicate that average inflation would likely settle below the target range of 2 to 4 percent for 2015,” Bangko Sentral Governor Amando Tetangco Jr. said.
Inflation rose in November to 1.1 percent from the record-low 0.4 percent in October, bringing the average in the first 11 months to 1.4 percent, below the target range of 2 percent to 4 percent.
Tetangco said the US Federal Reserve’s decision to raise interest rate would calm global financial markets and benefit emerging economies.
The US central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent.
“The Fed’s action brings an end to the liftoff uncertainty. The Fed’s statement should anchor confidence on the path of growth and inflation in the US. We may see the US yield curve flatten, which would be positive for EMEs [emerging market economies] that have exposures in the long end of the curve or are planning to tap this sector for funding,” Tetangco said in a text message.
He said the regional currencies, including the peso, already moved lower against the US dollar in recent weeks.
“The Fed promised gradual hikes. That may be further moderated as the US enters an election year. That said, on balance, the Fed action should be constructive for EMEs…,” he said.
Finance Secretary Cesar Purisima said the Fed’s action was necessary to prevent mis-pricing of risks and assets. He said the rate hike was widely expected, and thus, allowed markets to price in its effects.
“Indeed, we have seen the impact of the anticipated liftoff across the region—but after the usual knee-jerk reactions, proof emerges that markets do differentiate economies based on fundamentals,” Purisima said.
He said even the peso showed weakness against the dollar, like other regional currencies, the local currency was among the few that had depreciated the least so far, which could be traced to the country’s solid macro-economic fundamentals.
“We are confident our economy is resilient from increased rates. The Philippines has been a current account surplus country for 12 straight years, and we expect this record to be maintained further by falling oil prices. We are on track to post a surplus of $14.2 billion this year, equivalent to 4.4 percent of GDP. Foreign reserves remain ample at $80.6 billion, able to cover 10.3 months of imports as of end-November 2015,” Purisima said.
He said he Fed’s liftoff would not also change the government’s financing plans. “We have taken care to do our homework. For example, our general government debt to GDP ratio is now at 36.2 percent from 44.3 percent in 2009. I believe our borrowing costs will continue to narrow because of positive investor sentiment on the back of good fundamentals,” he said.
Purisima said if a liftoff was any indication of a stronger US recovery, this would benefit the Philippines because the US was one of the country’s largest trading partners.
Mervyn Tang, associate director of Fitch Ratings, said the Philippines would be more resilient compared to other emerging market economies because of its strong external finances.
“Fitch maintains a positive outlook on the ‘BBB-‘ rating of the Philippines. Fitch views the external finances of Philippines as a key credit strength. In Fitch’s view, steady current account surpluses since 2002 have led to a large build-up in foreign exchange reserves and that makes the Philippines more resilient than many other emerging market economies to any shift in global investor sentiment, following the Fed rate hike,” Tang said in a statement.