The Bangko Sentral ng Pilipinas (BSP) has more ammunition to effectively control inflation, liquidity and to guide market rates closer to the BSP rate, according to BSP Deputy Governor Francisco G. Dakila Jr.

Dakila, speaking before the private sector, multilateral funding agencies and investors attending the post-SONA Philippine Economic Briefing (PEB) on Tuesday, July 25, said that compared to the same period in 2022, when global oil and non-oil prices were on the rise persistently amid higher interest rates particularly from the US Federal Reserve, the BSP worried not just over elevated inflation but also the exchange rate because it was disanchoring inflation expectations.

Fast forward to today, the BSP official said instruments recently introduced by the BSP such as the 56-day new tenor in their BSP Securities Facility and the full allotment of the overnight reverse repurchase (RRP) to the banks – were all meant to improve monetary policy transmission.

“All of this are ammunition. Also, the market condition is very different now compared to last year and these ammunition meant that any change in the BSP policy will have a bigger influence on market rates,” Dakila told reporters on the PEB sidelines, in a mix of Filipino and English.

This makes the BSP more flexible and effective in managing inflation which is on a decelerating path since it peaked at 8.7 percent in January this year. As of June, the headline consumer price index (CPI) has dropped to 5.4 percent. Year-to-date, CPI average of 7.2 percent remains above-the-target of two percent to four percent.

Dakila said BSP’s new enhancements of its policy instruments should help improve the pass-through effect of benchmark rates and its open market operations.

More effective policy instruments will be able to better manage market reactions or sentiments in between a US policy rate action and a BSP response, which usually is about two to three weeks later, considered an eternity by a market-in-waiting.

As for the peso, economic officials think the peso at the P54-P55 level versus the US dollar is relatively stable.

Dakila maintained that the BSP continues to allow the peso to move in line with market fundamentals. Inflation expectation is a key concern when it comes to the exchange rate sensitivity to CPI. After the BSP raised the benchmark rates by a cumulative 425 basis points from May 2022 until March this year, the peso volatility has remained low as inflation also moved to a downward path.

However for now, despite the decelerating inflation, central banks’ higher policy rates across the globe has led to a tightening of global financial conditions.

Dakila reiterated Tuesday that the deceleration in CPI is due in large part to the BSP’s policy response amid price pressures and the ensuring portfolio balancing.

He is also confident that with years of BSP reforms and enforcement of policy tools and regulation, local banks are strong and resilient and not likely to be exposed to financial imbalances, given its “well-capitalized, well-managed and well-governed” position, resulting to policy rate adjustments that were “done without risking financial stability” and a “BSP that is well-equipped against the impact of external shocks.”

Meanwhile, Dakila said they have the arsenal and toolkit to manage any market reactions in the interim between a US Federal Reserve policy action this week and the BSP’s on Aug. 17 which is its next policy meeting.

“Having said that, the Monetary Board will take into account market reaction and implications on the inflation outlook and how that outlook relates to the attainment of the inflation target,” he said during a panel discussion in the PEB.

The BSP expects inflation will hit 5.4 percent for 2023 which is still above the target, and 2.9 percent for 2024.

The central bank also thinks inflation will be firmly within the target range by the first quarter of 2024 due to negative base effects and expected decline in oil and non-oil prices.

The Monetary Board has kept the 6.25 percent key rate unchanged for the past two policy meetings in a row amid a declining CPI path.