BSP to limit its forex intervention

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The Bangko Sentral ng Pilipinas (BSP) is set to establish a new foreign exchange intervention framework to limit its market interventions, according to BSP Governor Eli M. Remolona, Jr. The central bank aims to enhance the competitiveness of the peso by reducing restrictions in the foreign exchange market. The proposed framework, expected to be implemented this year, will focus on interventions during periods of market stress. Remolona emphasized the importance of infrequent interventions to contain stress effectively.

Senior Assistant Governor Edna C. Villa will lead the Financial Markets department, succeeding Ma. Ramona Gertrudes D.T. Santiago, who recently retired. The BSP intends to identify regional peers to ensure interventions align with market fundamentals. Remolona highlighted the stressful episode in October 2022 when the peso reached a record low of P59 against the dollar, prompting interventions to address inflationary pressures.

The BSP’s key interest rate currently stands at 6.5%, the highest in 16 years, following a series of hikes from May 2022 to October 2023. Remolona defended the rate, asserting its appropriateness to support growth and control inflation. While acknowledging upside risks to inflation, he expressed optimism about inflation settling within the 2-4% target range for most of 2024.

The BSP forecasts inflation to average 6% in 2023, easing to 3.7% in 2024 and 3.2% in 2025. A recent poll anticipates December headline inflation to reach 4%, consistent with the BSP’s forecast range. If realized, this would mark the first time in 20 months that inflation aligns with the central bank’s 2-4% target, signaling a positive trend in economic stability. The December consumer price index data from the Philippine Statistics Authority is expected to shed more light on this development.