SLOWER rate cuts by the US Federal Reserve (Fed) have strengthened the dollar and could pose risks to Philippine financial markets, the World Bank warned.
"Concerns over the pace of US monetary easing have increased financial market volatility," the World Bank said in its latest Philippines Monthly Economic Developments report.
The World Bank noted that the potential for slower Fed rate hikes had affected the Philippine Stock Exchange index (PSEi), which saw its gains slip from 4.6 percent in the month leading to September to 3.6 percent by Oct. 18.
The peso also depreciated by 3.5 percent in the 30 days prior to Oct. 18, influenced by the strong dollar's effect on currencies across the region.
The Philippine currency fell to a nearly three-month low last month, dropping back to the P58-to-the-dollar level. It has since regained some ground but remains in P58:$1 territory, closing at P58.1 on Thursday.
The PSEi, which also hit the 7,500 level earlier in October, ended the month down at 7,142.96.
The World Bank said that "sharp movements in the exchange rate could spur inflation" but also noted that the Bangko Sentral ng Pilipinas (BSP) had "held back from intervening in the market thus far."
BSP Governor Eli Remolona Jr. told The Manila Times in a text message that "as a matter of policy, we don't comment on future movements of the peso."
Earlier this year, the peso fell amid a strong dollar and signals from the central bank that it might start cutting key interest rates ahead of the Fed, making Philippine assets less appealing.
BSP officials have said that the decision to act before the Fed was data-driven. The peso steadily recovered after the Monetary Board began easing in August, but worries over the pace of Fed rate cuts and a possible return to the White House for Donald Trump again pulled it down.
The Fed implemented a significant rate cut in September and was initially expected to follow this up with additional reductions before the end of the year. Recent US economic data, however, have suggested that the pace of rate cuts could slow.
The World Bank, meanwhile, also noted that BSP's plans to further reduce the reserve requirement ratio (RRR) would minimize distortions in the financial system.
While the BSP has indicated that more RRR cuts are on the way, it clarified that these changes should not be seen as a shift in overall monetary policy.
It said that the winding down of the RRR was part of a "shift away from its use as a liquidity management tool toward more market-based instruments such as BSP bills and term deposit facilities."
The lower bank RRRs took effect on Oct. 25.
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