Peso will not stand still – BSP governor
Under a free-float environment
The peso is in a free-floating exchange rate environment, .not a fixed level, and the Bangko Sentral ng Pilipinas (BSP) will “practice self-restraint” to allow the local currency find its price discovery, said BSP Governor Nestor A. Espenilla Jr.
“Don’t expect the peso to stand still. We are on a floating exchange rate regime,” said Espenilla. As the peso finds it level – currently at the R51-$1 band – there is “natural volatility in this price discovery process because of timing and other uncertainties” and it is equally normal for a small open economy.
Espenilla added that, “if one wants more certainty to insulate a transaction from exchange rate volatility then invest in a hedge. For its part, the BSP has to practice self-restraint to allow the market to process all the information, allow it to operate efficiently, and determine market-clearing price.”
The BSP chief again warned the market against speculative activity and play the peso to be more volatile by creating unwarranted demand, hoard the currency and sell for a profit. “The BSP stands ready to intervene and neutralize the activity of speculators so they don’t define the market. They can’t be allowed to distort price discovery in search of quick profits by promoting exaggerated price movements and instability,” said Espenilla. “We have resources and regulatory powers to back the talk. The BSP has both capacity and resolve to act.”
Espenilla considers the peso depreciation as modest and gradual and that the peso falling 2.8 percent year-to-date is but a reflection of a “dynamic” price discovery process “on the back of strong and sustained imports growth as the economy hums along.”
He also noted the market adjustments which are expected ahead of the US interest rates normalization mode. “These have consequences for dollar supply and demand. The exchange rate needs to adjust in search of equilibrium. At its current zone, the peso has achieved healthy correction based on prevailing economic fundamentals.”
In explaining a market-determined exchange rate, Espenilla said this does not mean a “passive BSP”.
“Nothing can be farther from the truth… the BSP has several critical roles to play in a world of decisionmaking under uncertainty. First, it produces and publishes high quality and trusted information as well as objective analyses. This enables and promotes rational decision-making by all actors in the foreign exchange market. BSP can do this from its unique vantage point that allows it to accumulate data and act and speak with independence and competence.”
“Second, it crafts rational and transparent rules of the game and implements these effecrtively and fairly,” Espenilla added. “This promotes order in the foreign exchange market so that it can distill the decisions of market players trying to figure out the right price of the dollar in peso terms as they buy and sell dollars as a consequence of their own transactions with cutomers.”
The third and last critical role is the central bank’s ability to step in the exchange rate market to temper volatility and pressures on the peso.
As a free-floating exchange rate system, the BSP’s exchange rate policy is dictated by the supply of and demand of foreign exchange. However its intervention role is limited only to smoothening sharp fluctuations and if there are excessive peso movements.