BSP mulls ‘strong action’ vs speculative play on peso

To stop market play on the peso, the Bangko Sentral ng Pilipinas (BSP) has signalled its readiness to increase benchmark rates to temper exchange rate volatility since sustained pressures on the peso may have already worsen inflation expectations.

BSP Deputy Governor Diwa C. Guinigundo said the June inflation of 5.2 percent reading – which surprised both the BSP and the market – has presented the central bank with an unfolding new dynamics.

“Exchange rate volatility has introduced a new element in the inflation equation,” Guinigundo said on the sidelines of the BSP briefing. “While monetary policy under the inflation targeting framework does not normally respond to exchange rate movements, a monetary action is justified when large depreciation would translate into higher price pressures. This is what is happening today.”

BSP Governor Nestor A. Espenilla Jr. has referred to this new dynamics as well back in May when the BSP first raised rates this year. Last week, he reiterated that the weaker peso and its volatility has more of an impact to inflation outlook now and they are prepared to act in a "timely and decisive" manner, possibly as soon as August 9 when the Monetary Board meets for a policy action.

Presently, based on the central bank’s initial

econometric assessment, for every one percent depreciation, the pass through is around 0.6 percent. Since the peso has fallen or depreciated by seven percent, this adds another 0.42 percentage point to inflation.

According to Guinigundo, “a strong monetary action is expected to deliver the BSP’s disdain of negative external market sentiment driving the peso dynamics.”

“We have a strong economy,” he added. “Our prospects are outstanding given our demographic advantage and public spending on infrastructure and social safety nets. While we can accommodate the higher FX (foreign exchange) demand for imports, debt payments and outward investment of residents, we need to convey to the market our strong commitment to protect our inflation objectives.”