A market-oriented monetary policy is good for the peso

The MONETARY authorities argue that a market-driven exchange rate policy is still beneficial to the Philippine peso despite its depreciation.

As of today, the peso is trading at 56 against the US dollar, a far cry from 53 at the beginning of the year.

The local unit has depreciated about 10 percent against the US dollar since the start of the year, but authorities said the rate remains average compared to peers in the region.

President Ferdinand “Bongbong” Marcos Jr. Earlier it was said that the increase in domestic inflation is mainly due to imported inflation, referring, among other things, to the impact of higher oil prices.

Thus, faster inflation should be helped to tame through monetary policy adjustments.

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“Our monetary policy at the present time, in essence, is to use [the] interest rate to keep, take control [of the] inflation rate. We are not looking specifically at the exchange rate right now,” he said at an earlier briefing in Malacañang.

The National Economic and Development Administration said the peso’s 7.5% depreciation after the Federal Reserve announced its first rate hike of 0.25 percentage points on March 16 last year was broadly comparable to the Thai baht’s depreciation. (9.1%), Malaysian ringgit. (5.8 percent) and the Indonesian rupiah (4.6 percent).

Although the local unit is currently trading at 56 against the US dollar today, authorities said its yearly average remains within the interministerial committee’s forecast for this year’s foreign currency development budget between 51 and 53.

Bangko Central Bank and Philippine Governor Felipe Medalla. FILE TMT PHOTO

Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla traced the peso’s current weakness to a stronger US dollar, fueled in part by continued increases in the federal funds rate.

As such, he spoke of the need to be “on the lookout” for policy rate adjustments in line with the central bank’s price stability mandate and the need to help manage the effects of rising inflation. To date, key BSP rates have been raised by a total of 150 basis points – 25 basis points last May, 50 basis points last June and 75 basis points off-cycle on July 14 last year.

This increased the central bank’s overnight repurchase rate to 3.25 percent, the overnight deposit rate to 2.75 percent, and the overnight repurchase rate to 3.75 percent.

Medalla said the ongoing recovery in the domestic economy gives the Monetary Board an opportunity to raise the central bank’s key rates as it can offset the impact of rate adjustments.

He argued that “it is unwise to allow factors that significantly affect the exchange rate to further increase inflation, which [is] already high.”

“And because of that, BSP is poised to be more aggressive in raising its discount rates from its original gradual stance,” he said.

The rate of price growth in the country accelerated to 6.1 percent in June last year from 5.4 percent in the previous month.

Average inflation in the first half of the year was 4.4 percent, which is already above the target range of 2 to 4 percent set by the government.

BSP forecasts inflation to average 5 percent this year. Inflation exceeded the government’s target range in April last year, mainly due to rising global oil prices and restrictions on the supply of certain foodstuffs.

The monetary authorities have repeatedly supported the implementation of non-monetary measures to help manage the impact of higher inflation on domestic prices, as inflation was driven mainly by supply-side factors.