MANILA, Philippines – Waves of volatility had hit global financial markets including those in the Philippines this year on the back of anticipation for the US Federal Reserve’s tapering of stimulus. Despite the Fed announcement on Dec. 18 that it will finally start decreasing the volume of its massive asset purchases, the Bangko Sentral ng Pilipinas said volatility is seen to remain as the pace and timing of further scaling back the stimulus are still unknown.
“As long as there is uncertainty, volatility is likely to continue. So the less uncertainty there is, then we can expect dissipation of volatility,” BSP Governor Amando M. Tetangco, Jr. told The STAR.
“Now at least the uncertainty has been somewhat reduced because of the announcement of the Fed of the start of the tapering in January 2014 but the speed or the pace of the tapering and the amount that will be reduced are still unknown at this point in time,” he added.
The Fed, long expected to taper stimulus since May this year, has said it will finally reduce its monthly asset purchases by $10 billion to $75 billion starting January 2014 following the release of strong labor market data and proof that the recovery of the US economy is gaining traction.
But the Fed said it may implement further cuts in its bond buying program next year depending on the US jobs data, inflation, and if the economy is really getting strong enough to warrant a complete scale back of the stimulus.
“That still constitutes sources of uncertainty so I wouldn’t be surprised if volatility or at least some volatility will continue next year,” Tetangco stressed.
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The Fed’s stimulus was meant to inject money into the economy after it suffered recession in 2008. The monthly asset purchases of Treasuries and mortgage bonds were done in a bid to generate more jobs and spur economic growth.
The decision to finally start the tapering was made more than a week after US unemployment data showed it fell to a five-year low of seven percent in November as the economy created 203,000 more jobs. At the same time, the announcement came two weeks after the US Department of Commerce revised its third quarter gross domestic product estimate to 3.6 percent from 2.8 percent. The estimate was later revised higher to 4.1 percent.
The December announcement of the Fed may also prompt different policy responses from central banks all over the world. BSP Deputy Governor Diwa C. Guinigundo stressed that policymakers should be able to manage any effects of different policies calibrated to local markets.
“We believe we have ushered ourselves into a regime of higher market volatilities given the increased global economic and financial interdependencies. Our objective function will have to remain one of maximizing the benefits from every situation and minimizing our losses,” Guinigundo told the STAR.
“We need to be aware of the spill-over effects from the policies of our neighbors and the fall-outs from such policy moves. We need to sustain our regional initiatives to expand our markets, harmonize our market rules and conventions, and strengthen our existing crisis-prevention and resolution arrangements,” he added.
Guinigundo explained that as the Fed starts decreasing its stimulus, a rebalancing of portfolios will not only be made by banks and corporate but also by governments as well. Such will be a significant variable moving forward, he noted.
“2014 may also be a different year for the global economy. We seem to be entering into really a new normal of low growth and probably with some insipient inflationary pressures,” Guinigundo said.
Central banks and investors alike should have long prepared for the tapering in the context of needed adjustments and rebalancing of their portfolios, Guinigundo recounted.
And even as the majority of Fed officials during the December meeting said interest rates may likely remain near-zero until 2015, Guinigundo stressed “No one should ever think that he could forever live in a low interest rate world–that is fantasy land.”
The peso fell to a three-month low against the dollar at P44.435 on Dec. 19, following the Fed’s announcement of the start of the tapering. The Philippine Stock Exchange index, meanwhile, lost 38.43 points to finish at 5,923.12, far below its peak of 7,392.2 reached on May 15.
The BSP has always said it remains ready to deploy necessary macroprudential tools or to tweak policy rates should the situation call for it. Guinigundo pointed out the central bank has always been closely watching domestic and global events that may impact on the country’s price and financial stability, and on the economy as well.
“The BSP has long announced its continuing program of monitoring and surveillance of both domestic and global economic and financial developments. Our Monetary Board has always maintained that our monetary and banking policies will remain attuned to these developments, always flexible as to nuancing required by fast-moving market variables,” Guinigundo said.
“The BSP has made known to the markets that its exchange rate and reserves management policies will always be flexible. Market liquidity, both peso and dollar, will be assured by the monetary authorities. Regulatory relief will also be considered depending on what magnitude will be required in case of negative developments not otherwise factored into the policy equation,” he continued.
He further said “Macroprudential measures will also be useful. Capital flow management measures will not necessarily be ruled out, as the BSP has time and again looked at them as measures of last resort: we believe we have sufficient tools in our policy kit to manage any negative backlash.”
The BSP has kept the overnight borrowing and overnight lending rates at record low of 3.5 percent and 5.5 percent, respectively, since the start of the year. The central bank has cited the manageable inflation environment and the robust economic growth as reasons for maintaining key policy rates steady.
Inflation has so far averaged 2.8 percent as of November, still short of the BSP’s three to five percent target range. The Philippine economy, meanwhile, has already grown by 7.4 percent in the nine months to September, faster than government’s target of a six to seven percent growth this year.
