The central bank’s lower assumptions for peso and inflation for 2020, as approved by the inter-agency Development Budget Coordinating Committee (DBCC), along with the worse-than-projected GDP performance, will be key numbers that will influence monetary policy this month.
“We will be looking at implications of the latest GDP numbers as well as the latest inflation on the forecast, and we will be providing that to the board (Monetary Board) for the August 20 policy meeting,” said Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila Jr. The August 20 Monetary Board policy meeting is its fifth for the year. In the previous four meetings, the BSP cut interest rates by a combined 175 basis points.
On Thursday, the DBCC assessed the first six months’ economic performance and the 16.5 percent second quarter GDP contraction, and in deciding on its implications for all other economic indicators, has adjusted this year’s inflation and the peso assumptions.
Due to the impact of the COVID-19 pandemic which subdued demand, the DBCC approved a 2020 headline inflation rate assumption of 1.75 percent to 2.75 percent, narrower than the previous 1.75 percent to 3.75 percent range that the committee approved last May 12.
The inflation assumption for 2021 to 2022 still holds at two-four percent. According to Dakila, “I think that the baseline will not change much and the inflation will very likely settle close to the midpoint of the target range for 2020 to 2022.” He also said that the latest range that BSP has proposed and approved by the DBCC “remains appropriate at 1.75 percent to 2.75 percent for 2020 and two-four percent for 2021 up to 2022.”
On the exchange rate, Dakila said the DBCC has also approved its proposal to have a tigher assumption band for this year of P50 to 52 versus the US dollar, but will maintain the previous P50 to P54 assumption for 2021 and 2022.
“Now for the peso-dollar rate, the year-to-date average as of the 5th of August is at P50.31:$1. So, the assumption of P50 to P52 for 2020 remains appropriate. The year-to-date is safely within that range,” said Dakila.
For next year up to 2022, the BSP official said they have decided to retain the P52-54 range but that “the prospect is that the peso will remain quite stable.”
“(The) year-to-date comparisons between what’s happening to the peso against other currencies in the region, we’re actually one of the best performing,” said Dakila. “We have appreciated by 2.9 percent year-to-date. This is almost at par with the yen, which also appreciated by 2.9 percent and the Taiwanese dollar by 2.5 percent. In contrast, most of the other currencies in the region have weakened.”
Dakila also added, “I would think that’s really an affirmation of the market’s assessment that our external finances remain very stable and our current account will be very financeable.”