Although the Bangko Sentral ng Pilipinas still finds the peso strong—after so much depreciation in recent weeks—it still works around interest rate policy as a cushion to defend the peso’s fall.
But President Marcos on Tuesday said the government is ready to “defend the peso” in the next few months, as its weakness might continue to stoke inflation.
“We may have to defend the peso in the coming months, but the overall forecast is that we are still doing better than other countries in terms of inflation, though economic developments are still anticipated,” Marcos said via Twitter.
Marcos made the remarks after meeting with his economic team in Malacañang on Tuesday morning, when the peso closed at P58.75 to $1. Year to date the currency has weakened by 15.19 percent or P7.75 from its P51 close on Dec. 31, 2021, Business World reported.
Several weeks ago, economist and legislator Rep. Joey Salceda, of the committee of ways and means, forecast the peso to hit P65 to P68 to $1, which he said, he hopes should be arrested from free-fall because of adverse economic repercussions.
The peso slumped to a record low of P59 against the greenback in late September but has held near that level ever since. BSP has repeatedly said it’s not defending a specific target, but analysts say authorities have drawn a line in the sand to prevent the peso from piercing the key psychological level of P60 to $1, said Bloomberg.
Last Wednesday, Socioeconomic Planning Secretary Arsenio Balisacan said something must be done about the sharp fluctuations of the peso to make its movement predictable.
The Philippine peso is Southeast Asia’s worst-performing currency, having lost 13.4% against the US dollar so far this year as the Fed’s aggressive policy tightening to combat inflation boosts the greenback’s safe-haven appeal.
“We have to watch out for any sharp changes in the exchange rate and be able to do something about it,” Balisacan told reporters on the sidelines of a business forum.
“What’s important are the swings. We don’t want that,”Balisacan said as he stressed the government will not dictate policy to BSP, which had been active in the forex market and selling strategically to prevent “excessive” forex movements.
“The BSP does not normally react too much to movements in the exchange rate in keeping with our market-determined exchange rate policy,” said Gov. Felipe Medalla in a speech posted on the BSP website on Thursday.
“But the peso depreciation, while remaining in line with regional peers, has been adding to the buildup of inflationary pressures. This strengthened the case to act — and to act decisively.”
The peso will likely end the first quarter of 2023 at P59.2 per dollar, according to the median forecast in a Bloomberg survey.
“The trend of the peso remains tenuous with downside risks that could emanate from Federal Reserve hikes and dollar strength,” said Robert Dan J. Roces, chief economist at Security Bank Corp. in Manila.
At a Senate hearing on Wednesday, BSP Senior Assistant Governor Iluminada T. Sicat said the BSP “will always be ready to participate” in the forex market but only to “smooth out” excessive volatility “rather than defend a specific level or trend of the peso.”
“The BSP is also prepared to utilize other tools to respond to fluctuations in exchange rate,” Sicat said citing as examples the US dollar repurchase facility and currency swap arrangements.
Inflation still
Marcos said his administration’s No. 1 priority is still inflation, amid continued price increases in food, oil and utilities. “We will continue to use interest rates to mitigate the effects,” he said.
Inflation accelerated to 6.9% in September from 6.3% in August and 4.2 percent in September 2021. This was the sixth straight month that inflation breached the BSP’s 2-4 percent target this year. Year-to-date inflation averaged 5.1 percent, higher than 4 percent a year ago but below the BSP’s 5.6 percent forecast for 2022.
The BSP has raised key policy rates by 225 basis points (bps) this year to curb inflation and stabilize the foreign exchange market.
Medalla on Saturday said the policy rate should be over 100 bps higher than the Fed’s rate “to have some form of exchange rate stability.”
The US federal fund rate is now 3-3.25 percent, while the BSP’s benchmark rate is 4.25 percent.
The US Federal Reserve is widely expected to raise borrowing costs by another 75 bps at its Nov. 1-2 meeting, which will add to the cumulative 300 bps increase since March. The Monetary Board’s next