BSP’s ‘nonchalance’ amid peso slump still reasonable

The Bangko Sentral ng Pilipinas’ (BSP) minimal intervention in the foreign exchange market is deemed reasonable as the peso’s recent swings remain manageable despite successively hitting record lows in the past weeks, analysts said.   

“The BSP’s strategy of minimal intervention is largely reasonable and consistent with its general nonchalance rhetorically about the peso’s weakness,” Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, told BusinessWorld in an e-mail.

“While the level of the peso-dollar exchange rate is understandably attracting more attention these days, what matters ultimately for inflation is its rate of change year over year,” he added. “And, on this basis, panic would be very premature.”

According to Pantheon Macroeconomics, the peso has depreciated against the US dollar by an annual 1.4% as of January. This was slightly higher than the 0.8% decline posted in December, though Mr. Chanco noted that this remains “very manageable in the grand scheme of things.”

Since Jan. 5 or the second trading day of the year, the peso has closed at the PHP 59-per-dollar level.

On Jan. 15, it fell by two centavos to close at PHP 59.46 versus the greenback, breaking the previous all-time low of PHP 59.44 against the dollar on Jan. 14.

BSP Governor Eli M. Remolona, Jr. earlier said that they feel “tremendous pressure” to defend the peso amid its recent volatility, but they choose to disregard it.

Still, he noted that the central bank continues to make minimal interventions in the foreign exchange market to prevent sharp movements that may cause inflationary pressures.

Meanwhile, John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, noted that extended peso weakness might worsen inflation on imports and erode confidence in the currency.

“BSP’s light touch forex (foreign exchange) approach is acceptable while markets are orderly, but prolonged PHP (Philippine peso) weakness risks imported inflation and weaker confidence if expectations become unanchored,” Mr. Rivera told BusinessWorld in a Viber message. 

“This depreciation could reduce the likelihood of a near-term rate cut, as the BSP may turn more cautious to avoid fueling price pressures unless inflation stays firmly within target and the PHP stabilizes,” he added.

In December, the Monetary Board delivered its fifth straight 25-basis-point (bp) cut, bringing the benchmark policy rate to an over three-year low of 4.5%. It has so far reduced key borrowing costs by 200 bps since it began its easing cycle in August 2024.

The BSP chief has said that another 25-bp reduction at their Feb. 19 meeting remains on the table but may be unlikely considering current economic data.

Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said that the peso’s continued slump makes it difficult to justify any further easing soon, putting the BSP in a “tricky spot.”

“By keeping interventions minimal, the BSP preserves its reserves and signals confidence, but the risk is that a weaker peso quietly pushes imported prices higher and keeps inflation sticky,” he told BusinessWorld via Viber. “And because every bout of depreciation widens the rate gap with the Fed, the peso’s weakness makes a February rate cut much harder to justify.”

Mr. Ravelas noted that recent peso movements may be urging the central bank to pivot from easing to maintaining stability.

Still, the prevailing macro backdrop, particularly tepid economic growth, could outweigh peso concerns in shaping the BSP’s monetary policy.

This, Mr. Chanco said, would likely prompt the central bank to deliver a sixth straight 25-bp cut in February to end its easing cycle. 

“Of course, it would be an entirely different story if inflation was above the BSP’s target range and the PHP was wobbling more materially, but we’re nowhere near this scenario,” he added. — Katherine K. Chan, Reporter