BSP targets inflation via currency intervention

The Star

28-04-2025

Volatility mitigation: People lounge around against the backdrop of a sunset at Manila Bay. Remolona says global factors, rather than domestic ones, are often the key drivers of volatility in emerging market currencies. — AFP
MANILA: The Philippine central bank says its periodic intervention in currency markets aims to stem pressures if the peso was to weaken, but that it's not trying to manage capital flows into and out of the country.
'We don't like to do capital flow management – we stay away from that, and we continue to stay away from that,' Bangko Sentral ng Pilipinas (BSP) governor Eli Remolona said in a panel discussion at the International Monetary Fund meetings in Washington last Friday.
'We intervene when we see that the peso is swinging to a point where it becomes inflationary, and then we try to slow down that trend.'
The unusually explicit comments about currency intervention come as export-oriented South-East Asia grapples with the fallout from US President Donald Trump's tariff policies.
The Philippines has fared better than many other emerging markets, with the peso advancing about 2.8% against the dollar this year even as the central bank lowered borrowing costs.
South-East Asia's biggest economy, Indonesia, has the region's worst-performing currency, with the rupiah declining 4.3% this year.
Bank Indonesia has repeatedly intervened to smooth out volatility as capital flowed out of the country.
Remolona said global factors, rather than domestic ones, are often the key drivers of volatility in emerging market currencies.
'The single biggest risk factor that distinguishes emerging markets from advanced economies is the exchange rate,' he said in the discussion that was moderated by Bloomberg Television's Lisa Abramowicz.
'What happens in the Philippines is the peso swings up and then it swings down, it appreciates and depreciates.
And usually it's a dollar story: It's the dollar responding to geopolitical factors.'
Investor concern about the Trump administration's policies has recently reduced the attractiveness of the dollar, alleviating some pressures on emerging market currencies.
On April 10, when the BSP cut rates, Remolona told a briefing that 'like the rest of the world, we're looking at slower growth, but unlike the rest of the world, we're looking at lower inflation'.
That allows the bank to have an accommodative monetary stance, he said at the time. The Philippine government has said it wants growth to accelerate to at least 6% this year from 5.6% in 2024, when multiple typhoons ravaged farm crops.
In early April, the central bank lowered its forecast for risk-adjusted inflation to 2.3% this year from the 3.5% prediction it made in February.
But in his last Friday panel, Remolona made it clear that the BSP stands ready to act if exchange rate moves were to fuel price gains.
'If you look at the experience of inflation targeting, there's a compelling reason to do that,' he said.
'You're using foreign-exchange (FX) intervention for purposes of managing inflation, and that's okay.
'That's perfectly okay.' — Bloomberg