WebAdmin 1 0 0 7 min to read

BSP maintains its market-based foreign exchange strategy despite the decline

Despite the Philippine peso’s devaluation, monetary officials believe that a market-determined exchange rate strategy benefits the currency.

The peso is currently trading at a level of 56 against the US dollar, a significant decline from its level of 53 at the beginning of the year.

Authorities claim that although the local currency has lost almost 10% of its value against the US dollar since the year’s beginning, it is still performing about averagely compared to other currencies in the area.

President Ferdinand “Bongbong” Marcos Jr. previously stated that the increase in local inflation rate is primarily caused by imported inflation, citing among other things the effect of the increasing oil costs.

As a result, monetary policy changes are required to assist slow down the rate of inflation.

“Our current monetary strategy basically uses the interest rate to hold and regulate the inflation rate. He stated in a previous briefing in Malacanang, “We are not looking especially at currency rate at this time.

The 7.5 percent depreciation of the peso since the Federal Reserve announced its 0.25 percentage point first rate hike on March 16 is broadly comparable to the 9.1 percent depreciation of the Thai baht, the Malaysian ringgit, and the Indonesian rupiah, according to the National Economic and Development Authority (NEDA) (4.6 percent).

Authorities stated that although the local currency is presently trading at a level of 56 versus the US dollar, its average for the year is still expected to be between 51 and 53, as predicted by the interagency Development Budget Coordination Committee (DBCC).

Felipe Medalla, the governor of Bangko Sentral ng Pilipinas (BSP), has linked the present peso deterioration to the strengthening of the US dollar, which has been helped in part by the Federal funds rate’s ongoing hike.

Thus, he emphasized the necessity for policy rate changes to be “on their toes” in light of the central bank’s mandate for price stability and the need to assist in mitigating the effects of rising inflation rates. BSP has hiked its key rates a total of 150 basis points so far: 25 basis points in May, 50 basis points in June, and 75 basis points off-cycle in July.

These increased the overnight reverse repurchase (RRP), overnight deposit, and overnight repurchase (RP) rates of the central bank to 3.25 percent, 2.75 percent, and 3.75 percent, respectively.

The Monetary Board (MB), which sets policy, has the discretion to raise the key interest rates of the central bank because the domestic economy is still recovering and can withstand the effects of the rate increases, according to Medalla.

He said that “letting factors that significantly affect the currency rate add further to the inflation that (is) already high [was] not wise.”

And as a result, as opposed to its initial gradualist position, the BSP is prepared to be more aggressive in boosting its policy rates, he added.

From 5.4 percent in May to 6.1 percent in June of last year, the country’s price growth rate surged.

Average inflation over the first half of the year was 4.4 percent, which is higher than the government’s target range of 2 to 4 percent.

Inflation is expected to be, on average, 5% this year, according to the BSP. Last April, inflation went above the government’s goal range, largely as a result of rising international oil costs and supply shortages for some key goods.

Since the increase in inflation rate was mostly attributed to supply-side issues, monetary authorities have frequently supported the implementation of non-monetary measures to help manage the impact of elevated inflation rate on domestic prices.

On the supply side, the NEDA said that the government has stepped up its efforts to reduce inflationary pressures, such as the temporary lowering of import tariffs for commodities like corn, rice, pork, and coal under Executive Order 171.

The effectiveness of EOs 134 and 135 that reduced the most favorable nation (MFN) tariff rates for the importation of rice and pork is extended by EO No. 171. Additionally, it lowers corn’s MFN tariff rates to 5% for in-quota and 15% for out-quota, citing the fact that corn represents more than 50% of the cost of production for large-scale swine and broiler farms.

Programs like the National Rice Program, credit and extension services, and the “Plant, Plant, Plant” Program, which attempted to solve the issues the pandemic brought to the local food systems, are also being implemented throughout the country to help increase production.

However, since the increased inflation rate’s second-round impacts, such as increases in minimum fares for public transportation and minimum wages for workers, have already manifested, monetary authorities declared that an aggressive monetary policy is now required.

Medalla stated that the Board continues to be data-dependent when making policy decisions and that she is still open to another rate increase at the MB’s upcoming rate-setting meeting on August 18.

Impacts

A higher foreign currency rate, according to the NEDA, is a “positive development” for Philippine exporters of goods and services, notably those in the business process outsourcing (BPO) and tourism-related industries, who may become more price competitive with other nations.

Filipinos living abroad and the people who depend on them also profit because they get more pesos for every dollar. Imports also bring in more money for the government, it claimed.

However, a higher foreign currency rate raises the cost of imported products and services that businesses and consumers must pay domestically.

The cost of servicing the government’s and the private sector’s foreign debt also rises when the peso is weak, it was said.

Please follow and like us:
error1
fb-share-icon
Tweet 2k
fb-share-icon20
0 0 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
error

Enjoy this blog? Please spread the word :)

0
Would love your thoughts, please comment.x
()
x