Peso still stable amid hitting 11-year lows

HOPES FOR additional hikes in the Federal Reserve rates as well as naming of a hawk to head the Fed are the recent reasons for the drop of the Philippine peso to its 11-year low to a greenback, according to Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr.

He assured the peso remains stable and that there is no need to worry about its recent depreciation, adding, it is just part of an “adjustment process.” He stressed that domestic economic fundamentals remain sound, with external debt still low, inflation remains manageable, growth continues to be firm and the current account, despite being in deficit, is still “highly financeable.”

“The Philippines today is a very different economy than the crisis economy in the 1980s wherein our reserves are negative if you include the liabilities of the BSP,” he said.

Espenilla said the BSP does not need to intervene big time on the peso since the central bank has taken a market-determined policy on the foreign exchange. “The exchange rate is a policy instrument of the BSP not a target so it is allowed to move flexibly in line with global external and domestic shocks,” he said, noting that “all of the fears and uncertainties in the world are reflected in the day to day volatility of the exchange rate.”

He considers the latest depreciation level of the local unit as moderate and gradual and assured the public that the central bank is always ready on its “tactical intervention” to address extreme volatility.

“My only point is that it is not a target for the BSP but we believe that the peso is going to be generally stable over the medium term horizon,” he said.

Espenilla also said there is no need to adjust policy rates because of the latest peso movement because increasing the key rates, which is focused on inflation, “has a bigger economy-wide impact.”

“If the foreign exchange is already beginning to influence inflation in a way that makes us breach our target, then that may warrant a response from the BSP. But I said we have other tools. We've got big reserves that we use for tactical intervention,” he said.

The BSP currently have one of the lowest key policy rates in the world. To date, its overnight borrowing or reverse repurchase rate is three percent, the overnight lending or repurchase rate is 3.5 percent and rate of the special deposit account rate is 2.5 percent. These three represent the central bank’s Interest Rate Corridor, put in place since June 2016 to make the BSP better manage inflation and support long term growth.

As of end-september this year, the country’s gross international reserves reached $81.35 billion, enough to cover 8.5 months’ worth of imports of goods and payments of services and primary income. However, average inflation rate in the first nine months this year stood at 3.1 percent, within the government’s two to four percent target for 2017 to 2019 and below the central bank’s 3.2 percent forecast for the threeyear period.