BSP expects peso to remain stable

Published August 28, 2020, 5:00 AM

by Lee C. Chipongian

Appreciation tempers inflationary pressures

The peso is expected to remain stable amid the public health crisis and its recent appreciation has tempered inflationary pressures and forecasts, said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

Diokno said the stability of the peso “has helped to temper inflationary pressures arising from increases in international prices of commodities, particularly crude oil, as well as agricultural food commodities” and it also moderated the latest central bank inflation forecasts.

The BSP has raised the 2020, 2021 and 2022 forecasts to 2.6 percent, three percent and 3.1 percent, respectively, last August 20 during its Monetary Board policy meeting where the benchmark rate was left unchanged. All current forecasts are within the government’s target range.

Diokno said results of the latest BSP’s survey of private sector economists for August 2020 showed a higher mean inflation forecast this year of 2.5 percent versus 2.4 percent in the July survey. “The mean inflation forecasts for 2021 and 2022 were unchanged at 2.8 percent and 2.9 percent, respectively,” he said.

“Over the near term, the peso should continue to reflect prevailing demand and supply conditions in the foreign exchange market,” said the BSP chief in Thursday’s “GBED” Talks online press chat. “As you know, the peso has appreciated despite the COVID-19 outbreak. This is because the market and investors continue to focus on the Philippines’ strong macroeconomic fundamentals.”

The local currency has appreciated by 4.24 percent year-to-date to P48.58:$1 by August 19 relative to the end-December 2019 exchange rate of $50.64.

“Favorable investor sentiment over the economy’s fundamentals is expected to provide support to the currency amid weaker inflows (exports, tourism receipts, remittances) due to the COVID-19 pandemic,” said Diokno.

He further noted that the peso will benefit with the gradual resumption of economic activity as the government assess the pandemic situation and easing of lockdown status.

In a nutshell, Diokno said: “The peso’s strength can be partly attributed to the Philippine economy’s sound macroeconomic fundamentals characterized by: a benign inflation environment; a strong and resilient banking system; prudent fiscal position; and a sufficient level of international reserve buffer.”

As often noted by the BSP and Diokno, the peso has performed better compared to other Asian currencies and appreciated vis-à-vis the US dollar along with the Chinese yuan, Taiwanese dollar, and the Japanese yen, year-to-date.

Diokno reiterated their freely-floating exchange rate policy. “As a matter of policy the BSP does not target a specific level of the exchange rate. This is in keeping in our objective of allowing the peso to be market-determined,” he said.

The government has recently approved a tighter peso assumption range for this year of P50 to 52 but will keep the P50 to P54 assumption for 2021 and 2022.

Diokno said the approved government peso-dollar assumption is primarily for the preparation of the National Government budget. “It should not be construed as a forecast of the exchange rate,” he said. The exchange rate assumption is based on the full-year average rather than the end of period trading level, he added.