The central bank is not worried about the recent movement of the peso-US dollar exchange rate, said Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr.
“When we go into the foreign exchange market, we’re mostly trying to just stablize a disorderly market,” he said in a forum. The peso in recent weeks have depreciated due to the broad US dollar strength. It is not only for the peso, but other currencies in the region also depreciated versus the greenback.
“If the (forex) rate is moving too sharply for the wrong reasons then we might come in. But mostly we just ignore it, it’s not been a big factor,” said Remolona.
The peso has not broken past P57 vis-à-vis the US dollar yet but it has been hitting intraday highs at P56.90 to P56.99 persistently.
Remolona’s rhetoric about the exchange rate spot market has not changed since he was appointed BSP’s seventh governor in July. He thinks the BSP’s hawkish stance is good for the peso.
The BSP’s aggressive nine straight rate hikes that brought the key rate to 6.25 percent has done enough to stabilize the exchange rate.
Remolona said the central bank will intervene only to calm the market but for the most part, it will continue to allow the peso to be influenced by market sentiments.
While the BSP’s key rate has remained steady for the past four Monetary Board policy meetings in a row, the BSP chief said they will likely raise benchmark rates when they meet on Nov. 16. He has also said that an off-cycle rate hike, which could be between Nov. 16 and the last policy meeting for the year on Dec. 14, is possible.
Policy rate actions have an impact on the exchange rate. A rate cut can lead to a weak peso while a rate hike could do the opposite. A peso depreciation can also directly affect inflation since it will increase the price of imported commodities.
To avoid extreme and substantial changes in the exchange rate, the BSP intervenes in the spot market to strengthen the peso by releasing US dollar liquidity. It withdraws from the country’s international reserves to do this.
In 2022, the BSP unloaded $15 billion to defend the peso against speculative attacks and to prevent it from breaking past P60. So far, the peso’s record-weakest level is P59 vis-à-vis the US dollar which was in September and October last year.
At the current P56 level, the BSP considers the peso movement as stable because it moves in both direction, either to appreciate or become stronger than the greenback, or it depreciates or closing weaker versus the US dollar at the end of the trading day. The BSP calls this a normal exchange rate day, driven by business operations.
Since the BSP uses a flexible and free-floating exchange rate policy, it remains market-determined. The BSP therefore does not target a peso level versus the US dollar nor do they announce forecasts. But 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.
Meanwhile, the peso has depreciated more in the second quarter this year compared to the first three months.
The peso has averaged at P55.65 in the second quarter, weaker by 1.42 percent compared to the first quarter. On a year-to-date basis, the peso has depreciated against the US dollar by 1.8 percent to close at P56.78 on Oct. 3.
The central bank noted that the peso’s depreciation was due to broad US dollar strength amid hawkish signals by the US Federal Reserve on the need to bring inflation back to the government target through additional policy rate increases.
The volatility of the peso’s daily closing rates as measured by the coefficient of variation stood at 0.89 percent in the second quarter, slightly higher than 0.81 percent in the first quarter. The coefficient of variation is computed as the standard deviation of the daily closing exchange rate divided by the average exchange rates during the period.