Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla has reassured the markets of BSP’s credibility in easing exchange rate pressures and in managing inflation expectations through appropriate policy actions.
Medalla reiterated on Wednesday, Nov. 3, that it is important to communicate the workings of a “credible central bank”.
He said the same thing in a recent forum hosted by Hong Kong-based regional publication, The Asset. “You got to come in and reduce the volatility,” said Medalla during The Asset’s summit in Manila last week.
Medalla said the BSP is focused on ensuring a stable foreign exchange (FX) market even as the peso hit a new low of P59 at the end of September, and tried to breach this level several times in October.
BSP’s presence in the spot market has prevented the exchange rate from breaking past P59. Before the long All Soul’s weekend, the peso regained lost grounds and appreciated back to the P57 level.
Intraday on Nov. 3, the peso fell to P58.23 vis-à-vis the US dollar. The BSP on Wednesday said it has consistently signalled to the market its “unwavering commitment to use the tools at its disposal to stabilize the exchange rate” and according to Medalla himself, “this underscores the importance of a credible central bank.”
“As a matter of policy, the BSP’s participation in the FX market is limited to tempering sharp fluctuations in the exchange rate (and the) BSP does not target nor avoid any level of the peso and does not alter currency trends,” the central bank said, adding that it “stands ready to provide liquidity and ensure that legitimate demands for foreign currency are satisfied when warranted.”
As the BSP defends the peso against further depreciation, it has tapped its FX reserves to smoothen FX volatility since early 2022. As of end-September, the country’s gross international reserves (GIR) has dropped to $93 billion from $97.44 billion in end-August.
From January this year of $107.68 billion, the GIR has lost $14.68 billion while the peso has devalued by P6.98 from its Oct. 28 closing of P57.97 versus end-2021 closing of P50.99.
Medalla has often said that the BSP has been wise to accumulate as much reserves in the past by buying FX.
“Under its expanded toolkit and in line with the central bank's price stability mandate, the BSP is now employing the reserves to sell dollars to help manage foreign exchange movements,” said the BSP.
Medalla said to boost GIR, the BSP “may tap other sources of dollars.”
"The tools that we can use for intervention are much larger than our reserves," said the BSP chief. The GIR is supported by foreign exchange inflows from Overseas Filipino remittances, business process outsourcing, and foreign direct investments. Tourism revenues, once recovered, is also a steady source of US dollars for the Philippines.
Medalla is the BSP’s sixth governor. He was Monetary Board member for 11 years before his appointment last June when the Marcos administration took over.
Last July, Medalla already emphasized on BSP’s credibility he assured the market of approproate policy stance.
He stressed on effective communication as key to credibly assuring the markets that fundamentals are intact and that appropriate policy actions will be taken when needed in a pre-emptive method by “reducing noise”.
The BSP use all types of forward guidance to help calm markets by providing a credible and clear direction of monetary policy especially as conditions change with policy normalization across economies.
The BSP’s Monetary Board, its policy-making arm, has been known to give purely qualitative forward guidance which are broad statements that give an overview of the likely future path of monetary policy.
Forward guidance is a policy tool that enhances the effectiveness of monetary policy by steering interest rate expectations and reducing market uncertainty. The most common BSP forward guidance is when they say the central bank “stands ready to adjust its policy settings as needed to ensure price and financial stability conducive to a sustainable economic recovery.”
Unlike the purely qualitative forward guidance, foreign central banks would often use state-contingent forward guidance which has specific conditions that should happen before any monetary policy action will take place such as when the inflation rate hits a certain level.
Time-contingent forward guidance, on the other hand, makes use of predetermined dates before adjusting monetary policy settings. This policy guidance approach would take actions in doses as per the announced time period.