BSP eyes framework for forex intervention

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is finalizing a framework that will limit intervention in the foreign exchange market during times of stress.

BSP Governor Eli Remolona Jr. revealed during the weekly membership meeting of the Rotary Club that the central bank wants the peso to be more competitive to boost the country’s exports.

Remolona has tasked BSP senior assistant governor Edna Villa to finalize a framework for intervention in the foreign exchange market.

Villa is now head of financial markets at the central bank, replacing BSP senior assistant governor Maria Ramona Gertrudes Santiago who has retired.

The BSP, from time to time, intervenes in the foreign exchange market using the country’s gross international reserves (GIR) to smoothen the volatility of the movement of the peso against the US dollar.

The country’s foreign exchange buffer fell below $100 billion as the BSP actively intervened in the foreign exchange market after the peso slumped to an all-time low of 59 to $1 in October 2022.

Together with the aggressive rate hikes and active participation in the foreign exchange market, the peso bounced back to the 53 to $1 level in February last year,  but almost touched the 57 to $1 in August and September.

The peso ended a two year slump as it gained 0.7 percent to 55.37 to $1 in end 2023 after depreciating by 9.3 percent to 55.755 to $1 in end-2022 from 50.999 in end-2021.

The BSP chief said the central bank continues to occasionally intervene in the foreign exchange market, but is now finalizing a framework that would serve as guidance.

“We’re developing a framework for intervention... We think intervention should only happen during times of stress. It’s meant to contain stress,” Remolona said.

He cited a stressful episode in October 2022 when the peso hit a record low of 59 to $1.

“So, those are the events in which we want to intervene. I think we’ve been intervening a bit too much. If it’s about containing stress, that also means intervention should be infrequent,” he added.

To contain stress in the foreign exchange market, Remolona explained that there is a need to look at the peers of the Philippines in the region when its comes to the movement of their currencies against the US dollar.

The BSP chief pointed out that there is a need to identify who the peers of the Philippines are when it comes to the movements of their currencies against the greenback.

“One of the homework is who are our peers? Which countries are in the same boat as we are,” Remolona added.

He added that the BSP’s Monetary Board would be briefed about the proposed framework.

During the event, Remolona also identified the challenges the country would face this year as risks to inflation remains tilted to the upside.

Inflation averaged 6.2 percent from January to November last year, well above the BSP target range of two to four percent despite easing to a 20-month low of 4.1 percent in November from 4.9 percent in October.

The BSP has made headway in its battle against inflation, as consumer prices declined from a 14-year high of 8.7 percent in January last year.

The central bank’s Monetary Board has raised key policy rates by 450 basis points since May 2022 to tame inflation and stabilize the peso.

This brought the benchmark interest rate to a fresh 16-year high of 6.50 percent, the highest since the 7.50 percent recorded in May 2007.