BSP calls for calm in FX market

With a peso that could break P60 to the US dollar any day, the Bangko Sentral ng Pilipinas (BSP) on Tuesday, Oct. 4, urged foreign exchange (FX) market players not to engage in currency speculation as the BSP tries to keep exchange rate pressures at bay.

In a rare statement, the BSP assured spot market traders that it is on top of the situation and will “manage” any disruption in the FX market and financial sector in general.

“We ask those who have the means not to take undue advantage of changing market conditions. This does not help the Philippine peso; it does not help the Philippines. What we can do is to bring all transactions into an organized and accessible formal market that offers consumer protection,” said the BSP in an attempt at moral suasion.

On Sept. 29, the peso hit the P59 level intraday for the first time. On Tuesday, the peso opened slightly stronger at P58.88 from its Oct. 3 closing of P59.

The BSP reiterated on Tuesday that the peso is only reacting to global developments and the US dollar’s strong position amid rising US interest rates.

The BSP also assured the market that it will continue to service all legitimate US dollar transactions.

“The USD (US dollar) spot market remains open and active while forwards and repos are available facilities. All of these can move the economy forward by supporting the financial leg underpinning economic activity and allowing for an orderly settlement of USD obligations. This puts the Filipino in a better position,” the BSP said.

It also reminded the public that there are “many reasons” for the peso depreciation and that the local currency’s movements is similar with other currencies in the region and outside of Asia.

“Market conditions around the world are challenging. Working together allows us to sustain our functioning financial market while appropriately managing the developing risks,” said the BSP.

As a free-floating exchange rate system, the BSP’s exchange rate policy is dictated by the supply and demand of foreign exchange. However its intervention role is limited only to smoothening sharp fluctuations and if there are excessive peso movements.

Last Sept. 22, the BSP raised the benchmark rate by another 50 basis points (bps) to 4.25 percent to not only manage the high inflation path but also ease the peso’s exchange rate pressures.

The BSP has always said that it stands ready to participate in the FX market only to ensure orderly market conditions and to reduce excessive short term volatility in the exchange rate. They are also prepared to utilize other tools to respond to fluctuations in the exchange rate to ensure that legitimate demand for foreign currency is satisfied.

For now, the BSP is handling the peso depreciation by raising the policy rate and through spot market interventions. Both actions also keep inflation from being disanchored against the BSP’s inflation expectations.

Since May 19, the BSP has increased its key rate by a cumulative 225 bps. Some market observers expect the BSP will raise the policy rate by 100 bps more during its last two monetary policy meetings for the year. The next policy meeting is Nov. 15.

Meantime, the BSP is closely monitoring depreciation pressures such as the aggressive monetary policy tightening by the US Federal Reserve and increased market risk aversion due to the Ukraine-Russia war. It is also closely monitoring the widening trade gap amid improving domestic demand and uptick in global oil prices which is also affecting the peso-US dollar rate.

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