MANILA, Philippines–The US Federal Reserve took a dovish stance at the conclusion of its policy meeting this week, putting Philippine monetary authorities on guard against possible shifts in investor sentiment that could affect the country.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said investors turned even more cautious given the US Fed’s mixed signals.
“Markets generally viewed the Fed move as dovish in that, while it paved the way for a hike, it lowered its forecast for benchmark rates,” Tetangco told reporters Thursday. “Markets remain cautious.”
On Thursday, the US Fed announced a cut in its growth forecasts for the American economy. In the same breath, it paved the way for a June hike in policy rates, which have stood at record lows since the 2008 financial crisis.
This comes ahead of the BSP Monetary Board’s rate setting meeting next Thursday. Local overnight borrowing and lending rates, which influence the cost of money in the country, currently stand at 4 and 6 percent, respectively.
Tetangco said the BSP would watch shifts in investor sentiment in the coming weeks as markets digest the Fed’s recent statement.
On one hand, confidence in the United States economy may attract cash from all over the world, resulting in capital leaving countries like the Philippines. On the other hand, weak conditions in Europe, where yields are negative, may make emerging markets such as the Philippines more attractive.
The movement of cash in and out of the country may undermine economic stability. The peso’s movement depends on demand, which can be inflated by an influx of investors. Excess liquidity may also emerge as a risk. Outflows, meanwhile, may drive the peso’s value down, making imported goods more expensive.
Earlier this week, Tetangco said the BSP would be mindful of possible risks from the sudden entry of excess cash into the country.
“This investor portfolio rebalancing for yield pickup increases the potential for excesses in certain segments of the financial and real asset market,” he said in an e-mail to reporters.
Interest rate adjustments, he said, may not be warranted, adding that the BSP stands ready to deploy measures to stabilize the financial market.
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