Steady US rates to benefit the Philippines

By Jerry Maglunog

Emerging market economies (EMEs) that include the Philippines are expected to benefit from the decision of US monetary officials to maintain key rates, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said.

After its September 16 to 17, 2015, meeting, the Federal Open Market Committee (FOMC) maintained the US Federal Reserve (the Fed) as the moderate expansion of domestic activity was countered by “soft” net exports and the still below-target inflation rate.

Tetangco, in a text message to reporters, said this decision was beneficial to EMEs “with good fundamentals and yield pick-up.”

“Over the medium term, however, the markets will have to watch for more definite action from Chinese authorities,” he said.

In August, the People’s Bank of China (PBOC) further devalued China’s currency to address the weakness in its exports. It also cut reserve requirements to help aid the drop in its stock market.

Tetangco believes the FOMC decision was the Fed’s way of avoiding “potential policy reversal,” given the uncertainties in global markets and their impact on the US inflation rate.

“With China’s slowdown, the low global oil prices and the US dollar appreciation would continue to dampen domestic US inflation (albeit positive deflationary pressure),” he noted.

Thus, said Tetangco, markets will remain on the lookout for “more definitive action” from China, as this affects the global market.

“We will watch the market price action to see how the market is digesting the Fed move, check for the impact of portfolio flows on domestic liquidity, and evaluate new inflation forecasts, to see if there is need to finetune policy levels or communication the central bank chief added.

Threats from weak global economy persist

The Fed kept US interest rates at record lows in the face of threats from a weak global economy, persistently low inflation and unstable financial markets.

While the US job market is solid, global pressures may “restrain economic activity” and further drag down already low inflation, the Fed said in a statement after a policy meeting.

Signs of a sharp slowdown in China and other emerging economies have intensified fear among investors about the US and global economy. And low oil prices and a high-priced dollar have kept inflation undesirably low.

The Fed’s announcement ended weeks of speculation about whether it might finally be ready to raise rates from the record lows it first set at the depths of the 2008 financial crisis. The ultra-low loan rates the Fed engineered were intended to help the economy recover from the Great Recession. Since then, the economy has nearly fully recovered even as pressures from abroad appear to have grown.

At a news conference, Fed Chairman Janet Yellen said a rate hike was still likely this year. A majority of Fed officials on the committee that sets the federal funds rate—which controls the interest that banks charge each other—still foresee higher rates before next year. The Fed will meet next in October and then in December.

“Every (Fed) meeting is a live meeting,” Yellen said. “In October, it remains a possibility.”

In their statement, Fed officials stressed they were “monitoring developments abroad” and that the global slowdown might restrain US economic growth and inflation levels. This appeared to be a reference to China, the world’s second-largest economy.

China’s economy has slowed for four straight years—from 10.6 percent in 2010 to 7.4 percent last year. The International Monetary Fund expects the Chinese economy to grow just 6.8 percent this year, slowest since 1990.

The Fed has kept its key short-term rate near zero since 2008. A higher Fed rate would eventually send rates up on many consumer and business loans.

The Fed’s action last Thursday was approved on a 9-1 vote, with Jeffrey Lacker casting the first dissenting vote this year. Lacker, president of the Fed’s Atlanta regional bank, had pushed for the Fed to begin raising rates by moving the federal funds rate up by a quarter-point.

Instead, the Fed retained language it has been using that it will be appropriate to raise interest rates when it sees “some further improvement in the labor market” and is “reasonably confident” that inflation will move back to the Fed’s optimal inflation target of 2 percent.

The Fed’s preferred measure of inflation was up just 1.2 percent in the latest reading and has been below 2 percent for more than three years.

In an updated economic forecast, 13 of the 17 Fed policymakers said they see the first rate hike occurring this year. In June, 15 Fed officials had predicted that the first rate hike would occur this year.

The forecast also reduced the number of rate hikes this year to show an expectation of just one quarter-point increase, rather than the two that had been the expectation at the June meeting.

The new forecast significantly lowered the expectation for inflation this year to show the Fed’s preferred inflation gauge rising just 0.4 percent, down from a 0.7 percent forecast in June. With AP