BSP monitors foreign exchange rate

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the depreciating peso is adding more pressures to the country’s elevated inflation, perhaps more so than originally observed, according to a report by Manila Bulletin.

“Adding further to inflationary pressures was the movement of the peso,” said Medalla in a Chamber of Thrift Banks event on Wednesday, Oct. 12.

Still, the BSP chief reiterated that the BSP “does not normally react too much to movements in the exchange rate in keeping with our market-determined exchange rate policy” unless it is threatening to disanchor inflation expectations.

“We view such movement as healthy market adjustment that sends appropriate signals to producers and consumers. But, the peso depreciation while remaining in line with regional peers, has been adding to the build up of inflationary pressures,” said Medalla.

The volatile exchange rate market has also “strengthened the case to act and to act decisively,” he added. A rapidly depreciating currency often leads to a spike in inflation because there will be more US dollar demand for a country such as the Philippines that are dependent on imports.

For months, the BSP has been busy managing high inflation which may or may not have peaked at 6.9 percent in September, and intervening in the foreign exchange (FX) market to smoothen volatilities.

The peso hit its lowest close on record at P59 versus the US dollar on Oct. 3 and then again last Monday. To prevent the peso from falling further and disrupting the inflation path, the BSP has lifted the key rate by a cumulative 225 bps since May to 4.25 percent.

“As our rate hikes kick in (with a 6-8 months lag) inflation for the second half of 2023 will likely be closer to three than four percent,” Medalla reiterated on Wednesday.

For 2022, the BSP’s average inflation forecast is 5.6 percent and 4.1 percent for 2023 – both years have inflation projections that are above the two-four percent target range.

“The high inflation of the first half (next year) will not be fully offset by the lower inflation of the second half, so we might slightly miss our target. Then, inflation will come down to within three percent by 2024,” said Medalla.

Medalla said the BSP is employing its full range of monetary policy tool kits to ensure inflation will return to within the target band by 2024 such as increasing the key rate without choking growth, FX intervention and government’s non-monetary measures.

“Some fear that our tightening will kill the nascent recovery. (But) our policy settings remain accommodative. Real policy rate while still quite low (despite the cumulative 225 bps rate hikes),” said Medalla.

Even at the four-percent level, the BSP rate is still considered low. In fact at 4.25 percent versus an inflation forecast of 5.6 percent, the real rate is still in negative territory.

Upside risks to inflation continue to dominate its outlook in the near term due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as transport fare increases. Downside risks, meantime, are still the weaker-than-expected global economic recovery as well as the resurgence of local Covid-19 cases in the country.

The BSP said that its recent policy actions are intended to bring inflation and inflation expectations back to the target range and to ensure balanced and sustainable growth of the economy in the medium term.

The next policy meeting is on Nov. 15 and the market expects the central bank to again increase the policy rate by 50 bps to 4.75 percent.