BSP chief vows to keep inflation, forex in check

MANILA, Philippines — A rejuvenated governor of the Bangko Sentral ng Pilipinas (BSP) has placed keeping inflation in check, the gradual reduction of banks’ reserve requirement ratio and game-changing market reforms on top of his agenda after surviving a health scare.

In his first speaking engagement after declaring he was cancer-free, BSP Governor Nestor Espenilla Jr. said in a keynote address during the General Membership Meeting of the Management Association of the Philippines (MAP) monetary authorities are paying careful attention to signs of higher inflation becoming more broad-based and persistent.

Espenilla said the BSP wants to make sure that inflation expectations remain consistent with the two to four percent target between 2018 and 2020.

According to Espenilla, the favorable inflation environment has allowed the BSP to promote greater economic activity as inflation was kept within the target range for the past six years.

However, inflation leapt to 4.5 percent in February from four percent in January, bringing the average inflation in the first two months to 4.2 percent. The February inflation figure was slightly above the target, but within the latest forecast of 4.3 percent set by the central bank.

He explained the first round price effects of the newly implemented tax reform law are evolving more or less as expected and are only transitory. “We don’t see it (inflation) exceeding five percent for 2018 and we expect it to decline and come back to target by 2019. This is what we see from the last time we took a look at it and we will revalidate that in the next few weeks,” Espenilla said.

The BSP chief said he would continue to pursue game-changing financial sector reforms, including initiatives to further develop the local currency debt and foreign exchange markets.

He said the central bank is finalizing an exposure draft, amending foreign exchange rules on foreign investments, while further amendments to adopt similar measures on trade and non-trade transactions is being undertaken.

“Over the medium term, we plan to enhance governance and foreign exchange market oversight that will improve transparency, price discovery and market conduct. Ultimately, we want to see a more liquid foreign exchange market that supports a flexible and market-determined exchange rate,” he said.

Espenilla also reiterated the decision of the Monetary Board to reduce the “ultra-high” reserve requirement ratio to 19 percent from 20 percent effective last March 2 was an operational adjustment to support the shift toward a more market-based implementation of monetary policy.

“There is misconception that these phased reductions in the reserve requirement signal easing of the monetary policy stance. This is certainly not the case and I cannot emphasize this enough, this is an operational adjustment that is part of innovative financial sector reforms that we are currently implementing,” Espenilla said.

On the other hand, Espenilla said the peso continues to reflect the day-to-day market operations. The peso is the weakest performing currency in the region after it breached the 52 to $1 level.

“There will be volatility, runs and corrections, but the peso is not expected to meltdown because the underlying economic fundamentals of the economy are healthy,” he said.

The depreciation of the local currency has mirrored the continued bullish sentiment on the economy’s growth performance and prospects as showed by the strong demand for imports, residents’ increased direct and portfolio investments abroad, and debt prepayments, according to Espenilla.

Espenilla said the economy may grow above six percent in the next three years.