Peso seen stable, competitive amid global volatilities

MANILA, Philippines – The real effective exchange rate (REER) of the peso will remain stable and competitive amid volatilities in the global financial markets brought about by the interest rate hike in the US and the fallout from the decision of the UK to leave the European Union, the Bangko Sentral ng Pilipinas (BSP) said yesterday.

BSP Deputy Governor Diwa Guinigundo said the country’s sound macroeconomic fundamentals would likely support the stability of the peso against the dollar. “The country’s firm macroeconomic fundamentals and strong external position could support the broad stability of the peso over the medium-term,” he said.

The Development Budget Coordination Committee (DBCC) decided to maintain the foreign exchange assumption at 45-48 to the dollar during its 168th meeting last Tuesday.

Within this range, Guinigundo said the REER of the peso would continue to be broadly stable and competitive.

The REER is a weighted average of inflation-adjusted bilateral exchange rates with currencies of trading partners. It reflects not only movements in nominal exchange rates but also inflation differentials with trading partners.

“It’s been P45-48 since the beginning of the year. This range is based on the sustained stability of our external payments position despite the external challenges due to our good macro fundamentals,” he said in a text message.

Amid the weaker peso assumption, Guinigundo said the country’s balance of payments (BOP) position and current account (CA) would continue to book surpluses due to cash remittances from overseas Filipinos as well as receipts from tourism as well as the business process outsourcing (BPO) sector.

“We expect a BOP, CA surplus. Despite challenging external conditions, we’re able to maintain a CA surplus on account of higher remittances, BPO, tourism, income items,” he said.

The average peso exchange rate weakened to 46.90 to $1 in the first six months from the 45.20 to $1 level in 2015.

The DBCC also adopted the recommendation of the BSP to keep the inflation target range at two to four percent between 2016 and 2018.

The BSP’s lowered its inflation forecast to two percent instead of 2.1 percent this year but retained the projected 3.1 percent next year and 2.6 percent in 2018.

Inflation eased to 1.4 percent last year from 4.1 percent in 2014 due to stable food prices and cheaper utility rates amid the softening oil prices in the world market.