Central bank officials reiterated that despite its open foreign exchange (FX) market intervention to temper exchange rate spiral, it still does not target a peso level versus the US dolllar.
“We do not try to forecast the level of the peso,” according to Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila Jr.
When asked if the BSP is prepared to signal further interest rate increases to prevent the FX rate from hitting P60 soon, Dakila’s reply was BSP’s oft-repeated “We remain data dependent” catchphrase. The peso is currently at its new all-time low of P58.50 as of Sept. 23.
On Friday, Sept. 23, economist-solon Albay 2nd district Rep. Joey Salceda issued a statement warning the Philippine peso (PHP) could depreciate to P68 against the greenback. “This could go as high as P65 to P68 per dollar. And, frankly, there’s not much we can do," Salceda said.
But Dakila stressed, “We refrain from projecting the movement of the peso precisely because it is market-determined.”
Still, the BSP official is confident that the BSP decision last Thursday, Sept. 22, to raise the benchmark rate by another 50 basis points (bps) to 4.25 percent was enough to not only manage the high inflation path but also ease the peso’s exchange rate pressures.
“The judgment is that the policy rate decision (on Sept. 22) was sufficient to help bring back the inflation path to a target-consistent behavior,” said Dakila.
He also explained that in raising interest rates, the BSP does not intend to target a particular peso level versus the US dollar but to return the inflation rate to within the two percent to four percent target range as soon as possible. As a consequence of a higher BSP rate though, it will help alleviate pressures off the peso which in turn, will curb inflationary impulses due to steep global commodity prices.
The BSP stands ready to participate in the foreign exchange market only to ensure orderly market conditions and to reduce excessive short term volatility in the exchange rate, said Dakila. They are also prepared to utilize other tools to respond to fluctuations in the exchange rate to ensure that legitimate demand for foreign currency is satisfied.
Based on the central bank’s latest Monetary Policy Report released in August, it noted that the peso will continue to top government’s exchange rate assumptions of P51 to P55 until 2023, however the factors that led to the depreciated peso could gradually disappear by late next year.
The BSP said exchange rate pressures may dissipate as the differential between domestic and global real policy rates start to close by the end of 2023.
While the BSP does not target or announce its preferred level for the peso, it expects the exchange rate outlook to be higher than what the inter-agency Development Budget Coordinating Committee (DBCC) assumed was P51 to P53 for 2022 and P51 to P55 for 2023 and 2024. The DBCC assumptions are also not targets but guides for the purpose of setting the national budget, GDP and external sector assumptions.
For now, the BSP is handling the peso depreciation by raising the policy rate and through spot market interventions. Both actions also keep inflation from being disanchored against the BSP’s inflation expectations. Since May 19, the BSP has increased its key rate by a cumulative 225 bps. Some market observers expect the BSP will raise the policy rate by 100 bps more during its last two monetary policy meetings for the year. The next policy meeting is Nov. 15.
Meantime, the BSP is closely monitoring depreciation pressures such as the aggressive monetary policy tightening by the US Federal Reserve; increased market risk aversion due to the Ukraine-Russia war; and widening trade gap amid improving domestic demand and uptick in global oil prices.
As a free-floating exchange rate system, the BSP’s exchange rate policy is dictated by the supply and demand of foreign exchange. However, its intervention role is limited only to smoothening sharp fluctuations and if there are excessive peso movements.