Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila Jr. said the peso at mid-P56 versus the US dollar is "much more stable" today compared to same period last year.
Dakila said the BSP’s aggressive nine straight rate hikes that brought the key rate to 6.25 percent as of March this year has done enough to stabilize the exchange rate.
“There was intervention by the BSP in the market to calm the foreign exchange market (in late 2022) and also adjustments in the policy interest rate has implied that the peso has now become much more stable,” he said. Dakila is currently in Dubai, United Arab Emirates. He and the administration’s economic team held a Philippine Economic Briefing last Sept. 12, its first in the Middle East.
The BSP official assured investors and market traders that the central bank will continue to allow the peso to be influenced by market sentiments, and that its hawkish stance is good for the peso.
“We have remained committed to market determination of the peso,” he said.
He also stressed that the BSP “has only participated in the foreign exchange markets when the peso became volatile and post risks to inflation. Such was the situation in the third quarter last year when the Fed (US Federal Reserve) began to aggressively adjust the Fed policy rate.”
The BSP’s key rate remains at 6.25 percent for the past three Monetary Board policy meetings in a row, but the BSP always signals its hawkish stance. From May 2022 until March 2023, the BSP raised its benchmark rate by a cumulative 425 basis points, partly in response to the US Fed’s own aggressive policy actions to battle its inflation problems.
Policy rate actions have an impact on the exchange rate. A cut in rate can lead to a weak peso, for example, while a rate hike could do the opposite. A peso depreciation can also directly affect inflation since it will increase the price of imported commodities.
To avoid extreme and substantial changes in the exchange rate, the BSP intervenes in the spot market to strengthen the peso by releasing US dollar liquidity. It withdraws from the country’s international reserves to do this.
In 2022, the BSP unloaded $15 billion to defend the peso against speculative attacks and to prevent it from breaking past P60. So far, the peso’s record-weakest level is P59 vis-à-vis the US dollar which was in September and October last year.
Last month, BSP Governor Eli M. Remolona said BSP’s tightening bias is good for the peso-US dollar rate because it props up the local currency despite some volatility.
At the P56 level, the BSP considers the peso movement as stable because it moves in both direction, either to appreciate or become stronger than the greenback, or it depreciates or closing weaker versus the US dollar at the end of the trading day. The BSP call this a normal exchange rate day, driven by business operations.
Since the BSP uses a flexible and free-floating exchange rate policy, it remains market-determined. The BSP therefore does not target a peso level versus the US dollar nor do they announce forecasts. But as a consequence of a higher BSP rate though, it will help alleviate pressures off the peso which in turn, will curb inflationary impulses due to steep global commodity prices.
As of its opening trade on Wednesday, Sept. 13, the peso was at P56.68 to the US dollar. This was weaker from its last close of P56.65 on Sept. 12.
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