BSP to stick to inflation targeting as primary policy

The Bangko Sentral ng Pilipinas (BSP) has ruled out the possibility of twiddling with monetary policies in reaction to the gyrations in the peso-dollar exchange rate, saying that inflation targeting would remain as its primary policy framework.

Banks have been speculating that the fluctuations of the peso would soon compel the BSP to either adjust its policy rates or move its reserve requirement and tiering policy.

According to BSP deputy governor Armando Tetangco, the central bank has no plans of touching any of its monetary tools unless the impact of recent fluctuations in the foreign exchange rates actually begins to affect domestic inflation rates.

"Banks get scared of their own shadows," Tetangco said. "At this point, there is no discussion of anything they are nervous about and inflation targeting remains our policy framework."

In the past, the BSP’s policy framework had been currency-driven and monetary officials had no compunction to use monetary tools in order to protect the peso from radical gyrations.

Since then, however, the BSP has stuck to inflation targeting, making occasional forays into the currency market only when the peso showed indications of being attacked by excessive speculation.

This year, the government’s full-year target inflation rate has been set at four to five percent. This means that the BSP has enough room to leave its policy rates untouched since the inflation rate appears to be holding at low levels, increasing only slightly in January to 2.7 percent.

Tetangco however admitted that the fluctuations in the foreign exchange rate could eventually have an impact on inflation and this could necessitate a corresponding action by the BSP.

The peso has been testing the psychological 54:$1 mark. Last week, the currency managed to close below this level only because the BSP intervened in the market and managed to prop up the peso at the cost of $60 to $80 million.

"Ours is an open economy and this means that a depreciating currency would have an impact on inflation," Tetangco said. "But as long as inflationary impact is not affecting the outlook in inflation, there will be no movement in monetary policies."

Tetangco said the BSP is now monitoring the day-to-day trade of all registered currency traders in order to keep speculation and dollar hoarding in check.

Tetangco said the reaction of the market, while excessive, is also understandable. "The situation in the Middle East is the major factor but as soon as that is resolved, the currency will settle."

Last week, however, the BSP issued stern warnings against dollar hoarding, telling currency traders to open their transactions to central bank examiners who will be scrutinizing their daily trades for an indefinite period.

The BSP warned banks that they will be publicly named if found violating central bank rules, saying that it would adopt a name-and-shame policy if that was what it would take to preempt excessive speculation.

Tetangco said the BSP had anticipated the market’s reaction to the Middle East situation. "That’s why we are re-issuing our two circulars that require full documentation of currency trading," he said.

The BSP issued this warning, noting that there is an unusually high demand for foreign exchange caused possibly by concerns over escalating tension between the US and Iraq.

The BSP said it could not detect any other explanation for the sudden surge in the demand for dollars especially since trading has been markedly thin in the previous two weeks.