The Bangko Sentral ng Pilipinas (BSP) is expected to maintain a stable exchange rate level as the market awaits a possible rate hike next week.
BSP Governor Eli M. Remolona said the peso vis-à-vis the US dollar will move – either to depreciate or appreciate -- depending on how the BSP can calm markets ahead of its Aug. 17 Monetary Board policy meeting.
As of Friday, Aug. 4, the peso depreciated to P55.74 from its Thursday close of P55.52.
During the weekly Chat with SBED on Friday, Aug. 4, hosted by the Department of Finance for Secretary Benjamin E. Diokno, Remolona said the movement of the peso will depend largely on its forward guidance and how it could keep a decent gap or interest rate differential between the US Federal Reserve rate which was recently increased to 5.25 percent to 5.5 percent, and the BSP rate of 6.25 percent. The BSP has not changed its policy stance in the last two Monetary Board meetings.
The BSP considers a 75 basis points (bps) to 100 bps interest rate differential decent, although the market may sometimes prefer more than 100 bps and even up to 150 bps.
Remolona however said that despite the recent US rate increase, the peso has remained stable at P54 to P55.
BSP officials have said that they have more ammunitions to effectively control inflation, liquidity and to guide market rates closer to the BSP rate such as changes to open market operations.
BSP 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.
More effective policy instruments will enable the BSP 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.
BSP continues to allow the peso to move in line with market fundamentals while inflation expectation is a key concern when it comes to the exchange rate sensitivity. After the BSP raised the benchmark rates by a cumulative 425 bps from May 2022 until March this year, the peso volatility has remained low as inflation also moved to a downward path.
In addition, BSP’s aggressive presence in the spot market in the last quarter of 2022 has prevented the exchange rate from breaking past P59.
Meanwhile, the BSP uses 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.