The central bank has the tools to stabilize the peso-US dollar exchange rate and keep it at P55 or below this level in the next months, according to its highest-ranking official.

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona said that this year, the peso has been relatively stable. “It has remained below 55 pesos to one dollar. And that's how we hope it will continue in the next few months,” he said.

It is important for the BSP to maintain a stable exchange rate because it affects inflation which remains above-the-target at 6.8 percent for the first seven months against the two percent to four percent government target range.

On Aug. 7, the peso depreciated past P56 due to a stronger US dollar reacting to US jobs report and in anticipation of the release of US inflation data. The last time the peso was at the P56 level was in mid-June this year. Its strongest level between June and this week was P54.38 in mid-July.

Remolona, in his first appearance in a budget hearing in the Lower House, said the employment of BSP tools such its hefty reserves has resulted in the stability of the foreign exchange or FX/forex market.

He especially noted that for 2023, the peso has been stable and for the most part was below P55. 

The peso year-to-date has depreciated by less than one percent or 0.82 percent as of Aug. 10.

“This is a smaller depreciation than the depreciation that was seen by the currencies of most of our neighbors. So, I think we've succeeded in stabilizing the peso so that it doesn't get too harmful to our markets,” said Remolona.

BSP has three tools they use and one is monetary policy which is an inflation-fighting tool but Remolona said this has side effects on the exchange rate. The Monetary Board has raised the key rate by a combined 425 basis points from May 2022 until March 2023 and this tightening has resulted to a “somewhat stronger peso”.

The other more active tool is the BSP’s intervention in the FX market. Last year, when the peso started its rapid fall and was about to break past P60, the BSP has become very aggressive in supporting the peso.

BSP intervention basically is to “avoid destabilizing swings in the exchange rates which tend to upset the markets and make them worry about the peso in the future,” said Remolona.

“This tends to weaken the peso so we have judiciously intervened when things get too crazy in the foreign exchange market,” he said.

The third tool BSP uses to stabilize the exchange rate is the pre-emptive forward guidance.

“These are hints about what we might do in the next few meetings. This reduces the uncertainty in the market, reduces the risk premium that they assign to the peso, and so it helps to stabilize the peso. Of course, if the peso is moving in the direction that fundamentals say it should move then we let it move in that direction,” said Remolona.

The BSP does not target an exchange rate but uses spot market intervention and BSP policy rates to stabilize the peso-US dollar rates.

Since the BSP uses a flexible and free-floating exchange rate policy, it remains market-determined. It stands ready to participate in the exchange rate market only to ensure orderly market conditions and to reduce excessive short term volatility in the exchange rate.

The inter-agency Development Budget Coordinating Committee that BSP is part of has exchange rate assumptions for budget purposes. At the moment, the assumption is P53 to P57 vis-à-vis the US dollar.