BSP to ‘defend’ peso from ‘excessive volatility’

Guinigundo attributed the peso’s weakness to the country’s fast-growing imports, which is a sign of a healthy economy.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. on Tuesday said the central bank is “ready to act” against “excessive volatility” amid the Philippine peso’s downfall, hitting at its lowest level against the dollar in 12 years.

The peso close to a fresh low of P53.48 against the dollar on Monday, its lowest finish since 29 June 2006 when the local currency hit P53.55:$1.

In an economic briefing held in Tokyo, Espenilla said the last rate increase was meant to “temper inflation expectations” and “arrest potential second-round effects.”

“We stand ready to adjust further as necessary,” he added.

Espenilla also stressed that the BSP is standing ready to take action to make sure that the inflation target is secured.

The move by the BSP came after investors called for a “more hawkish tone” from the central bank amid the peso’s losing streak.

Investors were fretting over whether policymakers are softening their defense against inflation, which hit 4.6 percent last month, the fastest on record since 2013.

A chief economist at one of the local banks who asked not be named told the Daily Tribune that the banking sector is at a loss why the surprise has not yet intervened despite the continued slide in the local currency, saying that the central bank is not “as active as before” when the peso is showing signs of weakness.

“Maybe the central bank is still comfortable with the exchange rate. Or Maybe they are just choosing their space and saving their bullets for something they are programming,” the banker added and said that the continued drop in the peso’s strength could signal another rate hike. The BSP raise policy rates last month for the first time in four years to tame inflation.

However, the banker said that another rate hike could have an inflationary effect on the peso.

According to Espenilla, the downward movement of the peso is market-driven but added that the local currency continues to draw support from investors because of the country’s stable macroeconomic fundamentals.

Despite the weakening peso, the Philippines remains one of the fastest-rising economies in Asia after posting a solid 6.8% growth in the first quarter, giving the BSP enough ammunition to address inflation.

The BSP chief also dismissed fears that the economy is at risk of overheating despite the strong growth the past few years.

“We see limited evidence of this based on inflation dynamics,” he said adding that the central bank is seeing signs that inflation has slowed down but the BSP is still ready to revise its inflation target as “we move forward.”

Meanwhile, BSP Deputy Governor Diwa Guinigundo attributed the peso’s weakness to the country’s fast-growing imports, which is a sign of a healthy economy.

“Our economy is growing so our imports, especially capital goods that we need for production infrastructure. This means there is a strong demand for dollars,” he said.

As for the country’s inflation rate, Espenilla asserted the rise in consumer prices is “slowing down” and may be nearing its peak, expecting it to reach an average of 3.4% in 2019 and might be revised downwards.

Atty. Paola Alvarez, spokesperson of the Department of Finance (DoF), shared Guinigundo’s views, who said that the fluctuation in the value of the peso is due to the government’s massive infrastructure program under the “Build, Build, Build” project.

She said, “The peso depreciation is not happening not because our economy is becoming weaker. What is happening is because we have so much importation of capital equipment that our demand for the dollar is increasing.”