Revising its macro-economic targets for 2004, the BSP projected the peso-dollar exchange rate to trade within a wide range of P54 to P56 to $1, due to continuing political uncertainties throughout 2004.
The BSP also announced its inflation target for 2004 to 2005 at four to five percent, as approved by the Development Budget Coordinating Committee (DBCC), the inter-government planning body that sets the annual macro-economic targets and assumptions.
BSP Governor Rafael B. Buenaventura announced yesterday that the inflation target remains consistent with the government’s economic growth target of 4.9 to 5.8 percent for 2004 and 5.3 to 6.3 percent for 2005 in terms of gross domestic production (GDP).
According to Buenaventura, the expected moderate increase in headline inflation would reflect the impact of improved output growth and aggregate demand conditions as well as the expected cost-push impact of factors such as the volatility in oil prices.
As a matter of policy, the BSP’s market intervention function is triggered only when the peso-dollar exchange rate threatens to have an adverse inflationary impact.
This means that if the exchange rate threatens to blow out its inflation target, it eases market pressure by "providing liquidity to the market", its euphemism for buying or selling dollars in the market when the peso is gyrating wildly.
Buenaventura said the inflation target was based on the assumption that the peso would range between 54 and 56 to the dollar, a range described by the market as "wide enough to land a Boeing."
"We opted for a wide range because we are expecting a lot of uncertainty and political noise," Buenaventura said. "At the moment, we are already paying a premium of at least two pesos just for political noise alone."
On the other hand, the BSP said it expected interest rates on the benchmark 91-day Treasury bills to reach 7.5 percent in 2004, especially since the government intended to source the bulk of its borrowing from the domestic market through the sale of government securities.
This projected rate would put the prevailing interest rate above the BSP’s policy rate which has been virtually frozen at 6.75 percent since March this year.
Buenaventura cautioned that the government’s borrowing mix could put pressure on the peso but the Department of Finance (DOF) said the 70-30 mix was not cast in stone and could be adjusted depending on market conditions.
Acting Finance Secretary Juanita Amatong told reporters that the National Government was even willing to go as low as 60-40 depending on market conditions.