MANILA, Philippines — Pressures on foreign exchange have largely dissipated, allowing monetary authorities to focus on taming inflation, according to the Bangko Sentral ng Pilipinas.
BSP Governor Felipe Medalla said the picture is quite different now as the peso has emerged as the best performing currency in the region.
The peso slumped by as much as 15.7 percent to hit an all-time low of 59 to $1 in October last year due to the series of aggressive rate hikes delivered by the US Federal Reserve intended to rein in inflation.
As the BSP matched the aggressive Fed rate hikes to maintain a healthy interest rate differential and stabilize the peso, the local currency ended 2022 9.3 percent weaker, closing at 55.755 to $1, from 50.999 to $1 in 2021.
Aside from the rate hikes, the BSP also actively intervened in the forex market to help the peso hit 53.68 to $1 last Feb. 3. The local currency has appreciated by 2.4 percent to 54.4 to $1 as of April 5.
“In contrast, the year-to-date, that is from the end of December last year to the present, we’re actually the most appreciated currency (in the region),” Medalla said.
Since its interest rate liftoff in May last year, the BSP has hiked key policy rates by a cumulative 425 basis points, bringing the overnight reverse repurchase rate to a 16-year high of 6.25 percent from an all-time low of two percent.
“So there’s a little bit more time to relax. In other words, on the exchange rate front, we can now be more focused. Because the exchange rate is not a problem [at this time], the interest rate can now be the instrument that’s fully focused on inflation,” Medalla said.
Inflation averaged 8.3 percent in the first quarter of the year, well above the BSP’s two to four percent target range, despite easing to 7.6 percent in March from 8.6 percent in February.
The BSP chief is confident inflation would ease to within the two to four percent target range as early as October this year.
“We’re not as worried about what the Fed does. But of course, if [the magnitude of the rate adjustment is] very large, we have to take that into account,” he added.
The BSP lowered its inflation forecasts to six percent from 6.1 percent for 2023 and to 2.9 percent from 3.1 percent for 2024.
Latest data from the BSP showed that the country’s forex buffer returned to the $100-billion level, hitting a two-month high in March due to higher inflation and the increase in the value of the central bank’s gold and forex holdings.
The gross international reserves (GIR) level inched up by two percent to $100.21 billion in March from $98.22 billion in February. This was the highest since the $100.66 billion recorded in January.
The GIR is the sum of all foreign exchange flowing into the country and serves as buffer to ensure that it will not run out of forex that it can use in case of external shocks.
The BSP dipped into the buffer to actively intervene in the forex market as the peso slumped last year.