THE US Federal Reserve’s accelerated tightening could “spell trouble” for global markets and individual economies like the Philippines, a former Bangko Sentral ng Pilipinas (BSP) official said.
“In the Philippines, if the BSP does not match US Fed action, and market sentiment is adverse against us (high debt-to-GDP ratio, worsening current account position, possible Omicron spread), it is possible to see significant cap-ital outflows. These could trigger peso depreciation, drain on FX (foreign exchange) reserves, and ultimately, higher inflation,” former BSP Deputy Governor Diwa C. Guinigundo said in a Viber message to BusinessWorld.
“Should the BSP do a parallel increase, and the economy continues to be fragile, the recovery could be stalled and cost of doing business goes up. The situation is a Catch 22,” he added.
The Federal Reserve on Wednesday said it would accelerate the tapering of bond-buying program, paving the way for three interest rate hikes by the end of 2022 as the US central bank battles a surge of inflation (Read related story on S2/1).
Mr. Guinigundo noted that BSP’s accommodative policy considers expectations of manageable inflation for the next two years.
“It [BSP] should be sure of its forecasts though because any single mistake is costly considering that monetary policy works with a long and variable lag. Any sign of market backlash from US Fed and inflation acting up should be immediately dealt with very decisive monetary policy action,” he said.
Headline inflation slowed to a four-month low of 4.2% in October, but still above the 2-4% BSP target. This brought year-to-date inflation to 4.5%.
Despite inflation exceeding the BSP target every month except July, officials have focused on keeping easy monetary policy to support growth.
The BSP on Thursday raised its inflation forecast to 4.4% (from 4.3%) for 2021 and 3.4% (from 3.3%) in 2022. Meanwhile, inflation expectation for 2023 was kept at 3.2%.
Even as it flagged faster inflation, the central bank has maintained key policy rates at record lows on Thursday, citing the risks from new variants of the coronavirus disease 2019 and its possible impact on economic growth.
Meanwhile, BSP Deputy Governor Francisco G. Dakila, Jr. said they have already factored in the Fed’s action in their policy assessment.
“Our assessment, the baseline inflation path already takes into account market expectations on how interest rates globally and actually economies will also perform,” Mr. Dakila said in an online briefing.
He said any volatility arising from the Fed’s action will be guarded by the economy’s “very strong external position. He also cited the country’s hefty dollar buffers as well as the market exchange rate system as defenses in case of such situations.
“The stance of policy of the BSP has always been primarily conditioned by the domestic considerations and most importantly, the outlook for inflation. We have not had to move in parallel with the Fed actions in the past,” Mr. Dakila added.
The country’s gross international reserves dipped to $107.67 billion as of end-November from $107.89 billion as of end-October, BSP data showed.
This level is enough to cover 10.2 months’ worth of imports of goods and payments of services and primary income. It is also equivalent to 8.7 times the country’s short-term external debt based on original maturity and 5.7 times based on residual maturity.
Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said the central bank at this point should consider gradual adjustments to policy settings amid elevated inflation and an economic rebound that will likely drive do-mestic demand.
“We think the benefits of a mild hike (e.g., 50 bps) will outweigh the risk of eroding credibility, independence and consequences of falling too far behind the curve,” Mr. Neri said in a Viber message.
On the other hand, Security Bank Corp. Chief Economist Robert Dan J. Roces said the BSP is likely to take into account the threat from the Omicron variant and its possible impact.
“At this point, the central bank will certainly want to focus in continuing to support the nascent recovery,” Mr. Roces said in a Viber message. — Luz Wendy T. Noble