BSP ready to intervene to defend faltering peso  

Lawrence Agcaoili - The Philippine Star
BSP ready to intervene to defend faltering peso   
The local currency opened stronger at 58.35 and rallied to hit an intraday high of 58.25, but lost steam in afternoon trade to close at its weakest level.
STAR / KJ Rosales, file

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) will be more active in the foreign exchange market as the peso slumped to a new record low of 58.50 to a dollar yesterday from Thursday’s 58.49:$1. In an interview with Bloomberg Television in New York, BSP Governor Felipe Medalla said the central bank has been active in the foreign exchange market and would be even more active to smoothen the volatility of the peso against the dollar.

“Quite active, possibly we will  be even more active,” Medalla replied when asked if the BSP had a hand in the growing volume of transaction in the foreign exchange market in the past few days.

The local currency opened stronger at 58.35 and rallied to hit an intraday high of 58.25, but lost steam in afternoon trade to close at its weakest level.

Trading volume dropped by 35 percent to $985 million from Thursday’s $1.51 billion.

The intervention of the BSP using its gross international reserves (GIR) as well as its decision to further tighten monetary conditions somewhat softened the weakening of the peso against the dollar.

The BSP is likely to deliver more rate hikes until the end of the year to anchor inflation expectations and at the same time stabilize the peso.

So far, it has raised key policy rates by 225 basis points, bringing the overnight reverse repurchase rate to 4.25 percent from an all-time low of two percent.

The series of aggressive rate increases wiped out the 200-basis-point cumulative cuts in 2020 as part of the BSP’s COVID response measures.

Medalla confirmed the possibility of more rate hikes this year, not necessarily matching the increases delivered by the US Federal Reserve, as price pressures persist and second-round effects continued to manifest.

The BSP stands ready to participate in the foreign exchange market, using its forex reserves, to reduce excessive short-term volatility in the exchange rate.

“The strong dollar is requiring us to have a bigger policy rate increases,” Medalla said.

If not for the impact of the hawkish US Fed on the peso, the BSP chief said the Monetary Board would have raised key policy rates by only 25 basis points instead of 50 basis points on Thursday.

“In other words, we are responding both to making sure that the current inflation doesn’t get carried over to next year,” Medalla said.

Had the US Fed raised interest rates by 100 basis points, Medalla said the Philippine central bank would have reacted with a 75-basis-point increase on Sept. 22.

“We don’t have the same inflation problem as the US, so we don’t have to match them point by point,” he explained.

While the 2022 inflation is now expected to average 5.6 percent instead of 5.4 percent  and 4.1 instead of four percent for next year, Medalla said the consumer price index is  expected to ease back to within the three to four percent range by the second half of 2023.

Inflation averaged 4.9 percent between January and August, exceeding the BSP’s two to four percent target range.

It eased slightly to 6.3 percent in August from 6.4 percent in July, but is expected to pick up further in the coming months due to higher transport fares, food and sugar prices and the weak peso, among others.

Aside from hiking interest rates and intervening in the foreign exchange market, Medalla pointed out that there are other measures, including a possible off-cycle rate setting meeting.

“I won’t take it off the table, but I will not consider it to be the best scenario because we have other measures that we can take. We have large enough reserves to reduce the volatility so to speak,” he said.

According to the BSP chief, one approach is to intervene in the foreign exchange more strongly because the volatility is actually much higher.

Latest data showed that the country’s foreign exchange buffer stayed below $100 billion as it further declined to a two-year low of $97.4 billion in end-August from the revised $99.84 billion as of end-July. However, the latest GIR level is  more than enough  external liquidity buffer, equivalent to 7.8 months’ worth of imports of goods and payments of services and primary income.

Furthermore, Medalla said the BSP could borrow more via the 28-day central bank securities. “That will reduce liquidity further so that there will be less pesos to chase those dollars,” he said.


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