Bangko Sentral ng Pilipinas Governor Benjamin Diokno said Thursday the possibility of an early interest rate hike by the US Federal Reserve will not have any significant impact on the Philippines because of the country’s solid and strong macroeconomic fundamentals.
“Any rate hike by the Fed will not be an immediate threat to the Philippines. Our GIR [gross international reserves] is healthy and interest rates now are at rock bottom,” Diokno said in an online news briefing.
“There will be a mid-term election in the US next year. I doubt the Fed chairman will ‘rock the boat’ amid the [ongoing] uncertainties during the COVID-19 pandemic,” Diokno said.
Diokno assured that local monetary authorities would be ready if the Fed decides to increase interest rates sooner. “We could do a lot of measures [on this],” he said.
Reports from the US indicated the Federal Reserve signaled an increase in interest rates earlier than previously expected amid the accelerating economic growth and inflation.
After a two-day meeting, Fed officials left the main interest rate near zero and said the agency would continue to make massive purchases of Treasury and mortgage bonds to support financial conditions and the recovery.
More Fed officials now see a rate hike happening next year or in 2023. Most Fed officials in March expected no rate change through 2023.
The Monetary Board of the BSP on May 12 kept the record-low benchmark interest rate at 2 percent, on expectation that inflation rate would remain manageable in the coming months.
Diokno said Thursday the accommodative monetary policy and liquidity-enhancing measures of the BSP continued to support the domestic economy amid the health crisis by fostering favorable credit conditions and the orderly functioning of the government securities market.
“With a manageable inflation outlook, the BSP continues to prioritize the use of monetary policy space to provide support to economic activity amid the pandemic as key sectors transition to the post-pandemic phase,” he said.
The BSP’s liquidity-easing measures released up to P2.2 trillion or equivalent to 12.1 percent of gross domestic product into the financial system.
These measures included the 200-basis point cumulative reduction in policy rate in 2020, the reductions in reserve requirement ratios, purchases of government securities in the secondary market and provisional advances to the national government.
Diokno said with ample liquidity in the financial system, domestic interest rates gradually declined over the past several months, even as lending activity remained affected by banks’ risk aversion due to concerns over asset quality, profitability and the broader economic outlook.
“The prevailing stance of monetary policy remains anchored on the BSP’s assessment of a manageable outlook for inflation over the next two years,” he said.
“This outlook in turn is based on the continued predominant role of transitory supply-side factors in the inflation uptick in recent months. In addition, the extent of unused economic capacity amid the early stages of demand recovery partly mitigates the risk of near-term demand-driven pressures as well as second round-effects from supply-side inflation pressures,” he said.
Diokno said with asset prices keeping in line with overall market fundamentals, the BSP remained on the lookout for signs of imbalances amid a low-interest rate environment and in anticipation of further demand recovery.
“Looking ahead, the BSP shall remain vigilant to ensure that policy responses will neither lead to excessive inflation nor trigger financial stability risks, especially as economic recovery gets underway,” he said.