‘BSP ready to mitigate excessive peso volatility’

MANILA, Philippines — Monetary authorities are ready to mitigate any “unnecessary movement” and “excessive volatility” in the foreign exchange market as the peso sank to fresh 17-month lows against the dollar, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr.

Remolona said the recent volatility in the foreign exchange market was due to a strong dollar rather than a weak peso.

“Escalating tensions in the Middle East led to safe-haven flows into the dollar at the expense of most other currencies. Nonetheless, the BSP continues to monitor the market and stands ready to manage any unnecessary movement and excessive volatility,” Remolona said.

The comments from the BSP chief came after the peso slumped to 57.78 to $1 on Thursday, weakening by 23 centavos from its previous finish. It marked the peso’s weakest close in more than 17 months or since its 58.19 to $1 finish in November 2022.

The local currency yesterday gained by seven centavos to close at 57.71 to $1.

Markets have been closely watching the peso as it stayed above the 57 to $1 level for a second straight week.

This developed as rate cut bets have been pushed back due to the inflation outlook amid geopolitical tensions in the Middle East.

Despite the peso’s weakness against the greenback, the central bank is unlikely to raise borrowing costs further, Finance Secretary Ralph Recto told Bloomberg news.

Recto is one of the seven members of the BSP’s policy arm, the Monetary Board.

ING Bank Manila senior economist Nicholas Mapa said market players should not rule out a rate hike from the central bank.

“Although I agree that the recent pressure on the peso is largely a strong dollar story and that the foreign exchange pass-through on inflation is limited, we cannot rule out a rate hike from the BSP should the weakness persist as this could still spill over to imported inflation,” Mapa said.

In the near term, he said the local currency is expected to move along with most of its peers in Asia.

Security Bank chief economist Robert Dan Roces said the latest signal from Remolona reflects concerns on the potential foreign exchange rate pass-through to inflation.

“Based on the central bank’s own estimates, for every one-peso drop against the dollar, that’s only going to add up 0.076 percentage points to inflation in the short run. But when the peso depreciates too much, the currency rate pass-through should turn higher,” Roces said.

“This means sensitivity to international prices versus the volatility in the exchange rate, and this is not good news for a net importing country, notably in crude, but also imported food supply that is aimed at easing inflation,” he added.

The BSP’s aggressive rate cuts, moving in tandem with the US Federal Reserve, brought the benchmark interest rate to 6.50 percent, the highest since the 7.50 percent recorded in May 2007. This was after the Monetary Board hiked rates by 450 basis points from May 2022 to October 2023 to tame inflation and stabilize the peso.