The International Monetary Fund (IMF) said foreign exchange (FX) intervention remain crucial as a policy tool for price stability that the Bangko Sentral ng Pilipinas (BSP) employ, but it should be a temporary measure only.
“(The) Philippines has an inflation-targeting monetary policy framework, deployment of FXI (FX intervention), if any, should be temporary and not a substitute for warranted macroeconomic policy adjustments,” said IMF in its December 2023 IMF Country Report based on its Article IV Consultation last November.
This was the same assessment the IMF emphasized in its 2022 report, when it said BSP’s flexible exchange rate policy is an effective shock absorber while foreign exchange interventions help manage inflation and ease pressures on monetary policy.
In the latest country report, the IMF said that “markets should be kept liquid” and that “the exchange rate should remain flexible, and market driven.”
It also said that provided the monetary policy stance “remains adequate to address inflation risks, and considering Philippines’ shallow FX markets, the use of FXI may be appropriate under certain circumstances."
The IMF said while the exchange rate is an effective shock absorber, intervention is appropriate under certain circumstances to “smooth destabilizing premia and address risks to price stability” such as when “it could reduce ‘excessive’ depreciation of the exchange rate in illiquid FX markets following a large risk-off shock.”
For BSP, its key policy rate is its main policy instrument and the IMF considers other policy levers as "playing a secondary role" only.
Based on IMF and BSP consultations last November, the IMF said the BSP has emphasized that "any foreign exchange interventions are exclusively aimed at ensuring orderly market conditions and preventing sharp exchange rate movements from unduly influencing the overall outlook for inflation or the public’s inflation expectations.” This has been well communicated by the BSP to the public as part of forward guidance.
The IMF said the BSP is also studying the Integrated Policy Framework (IPF) analysis, whose model, structure and parameters will need more discussion with the IMF.
The BSP, according to the IMF, is interested in understanding the main differences “such as focusing on monetary policy transmission and policy simulations” between the BSP’s quarterly projection model and the IMF Institute for Capacity Development Technical Assistance and the IMF’s QIPF or the quantitative model for the IPF.
The IMF also noted BSP highlighting the importance of non-linear exchange rate pass-through. “They believe that small exchange rate fluctuations have no effect on inflation expectations, but that movements exceeding a certain threshold are capable of dislodging expectations, and, consequently, that such movements provide a potential rationale for smoothing exchange rate volatility,” said the IMF.
Last year, the BSP’s reserves declined mostly because of FX interventions. With a peso hitting an all-time low of P59 versus the US dollar in October 2022, the BSP released almost $15 billion to stop the peso from breaching past P60 at the spot market.
With BSP raising the key rate by a cumulative 450 basis points since May 2022, the peso-US dollar rate has become more stable especially in the latter part of 2023. It has remained relatively stable below P57, partly due to BSP's presence in the spot market.
BSP Governor Eli M. Remolona Jr. said last week that he was comfortable with the exchange rate level, currently at the mid to high P55-level, occasionally breaking P56 but appreciating quickly back to P55.
He said he remains hawkish with a 6.5 percent benchmark ending rate for 2023 and inflation averaging at 6.2 percent as of end-November, way above the target range of two percent to four percent.
Remolona said he does not see the Monetary Board reducing the key rate as yet, despite three months of slowing inflation.
The BSP expects inflation to hit six percent at the end of the year, based on its latest risk-adjusted forecast.
As for the peso, the BSP chief said he is “somewhat comfortable” at the current level.
“We’re more concerned when there are sharp movements but gradual movements that we saw since October last year, they’re less of a concern. We don’t focus anymore on the differential between our policy rate and the FOMC (Federal Open Market Committee) policy rate. The peso seems to move more because of either the differential forward guidance between the emerging markets and FOMC, and the levels of uncertainty,” said Remolona in an interview with CNBC Asia.