Peso drop not yet inflationary—BSP

The peso’s current depreciation amid the effects of the ongoing Middle East conflict has not yet breached inflationary territory, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr..

Speaking in a recent television interview, Remolona said the local currency’s depreciation does not always translate into upward inflationary pressures, noting that last month’s decline—driven by the conflict—was not sharp enough to be considered inflationary.

“Depreciation of the peso doesn't always lead to inflation. It has to depreciate sharply enough for it to be inflationary. But that threshold … has become lower than before,” he said.

The peso sank to record lows six times since the conflict’s escalation at the beginning of March, while inflation for the same month rose to 4.1 percent—up 1.7 percentage points from the previous month. Both were largely attributed to global oil price increases following the closure of the Strait of Hormuz, which accounts for around 20 percent of the world’s oil supply.

Earlier BSP studies show that a 1-percent depreciation of the peso translates to roughly a 0.05 to 0.15 percentage point increase in inflation. Since the conflict’s escalation in March, the peso—currently trading at P60.13 as of press time—has depreciated by about 4.28 percent from its 27 February close of P57.66, suggesting a limited inflationary impact so far.

In response to the currency’s sharp decline, the BSP carried out modest intervention, as previously confirmed by Remolona. The $5.2-billion monthly decline in the country’s gross international reserves (GIR)—which the central bank uses to help stabilize the currency—was partly attributed to foreign exchange operations.

“There were episodes when it was difficult. It's not so difficult right now,” said Remolona, who has repeatedly emphasized the BSP’s stance of allowing market forces—such as dollar demand and oil prices—to determine the peso’s value.

“We kind of try to dampen the swings and dampen the volatility. But market forces are causing the peso to depreciate over periods of time,” he added. “But some depreciation, I think, is called for. And that's what the market is trying to do.”

Remolona has also said that the peso’s depreciation is not necessarily a net negative, noting that it could help narrow the Philippines’ current account deficit and support export competitiveness.

“We've been facing trade deficits for several years now. Basically, our imports are too cheap and our exports are too expensive,” he said.

In the short term, a weaker peso can widen the current account deficit as imports—particularly fuel—become more expensive in peso terms. Over time, however, higher import costs may dampen demand and encourage the use of local substitutes, potentially improving the external balance.

A weaker peso also boosts the value of remittances from overseas Filipino workers (OFWs), while making Philippine goods and services more competitive abroad. However, this also raises the domestic cost of imports — including fuel, food and electricity inputs — driving inflation upwards and eroding purchasing power.