BSP chief says impact of peso weakness on inflation ‘not large’

MANILA, Philippines — The effect of a weaker peso against the dollar would not be large enough to have an adverse impact on inflation, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said.

Following the Monetary Board’s policy meeting yesterday, Remolona said monetary authorities are closely watching the movements in the foreign exchange market as they don’t want the peso to depreciate too sharply.

“We occasionally intervene. I think (yesterday) we did intervene. We don’t want the peso to depreciate too sharply (against the dollar),” Remolona said.

However, the impact of a weaker peso to inflation would not be very large, he said.

“We think the pass-through, which is what we call the effect of depreciation on inflation, is estimated at 0.36 percent per one percent depreciation of the peso,” Remolona said.

“Since the beginning of the year, the peso has depreciated by 5.7 percent. So 5.7 percent against 0.36 percent, that adds up to a total about 0.2 percent in inflation. So not a large pass-through,”

The peso closed at 58.75 to $1 yesterday, appreciating by eleven centavos from its 58.86 to $1 finish on Wednesday.

Year to date, the peso depreciated by 5.7 percent from its end-2023 close of 55.37 to $1.

The peso opened at 58.88 yesterday before hitting its worst showing of 58.92. Its intraday best was at 58.75 to the dollar. Yesterday’s trading volume rose by 67 percent to $1.2 billion  from $720.2 million on Wednesday.

According to Remolona, the BSP is only active in the foreign exchange market to mitigate stress.

“When the market becomes dysfunctional—in other words there is only one side, either selling or buying—then we come in on the other side,” he said.

“But mostly we come in to slow down the tendency of the peso to depreciate sharply. We don’t come in every day,” he said.

The BSP kept its key policy rates untouched for the sixth straight meeting yesterday, keeping the target reverse repurchase rate at 6.5 percent, the highest in over 17 years.

However, Remolona said risks to inflation have now shifted to the downside, which gives the central bank room to “more likely” ease at its meeting in August.