BSP clarifies points raised by Deutsche Bank on monetary policy

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“This pertains to the article by Ms. Mayvelin U. Caraballo entitled “Weak peso, twin deficits to force BSP to reset policy setting—Deutsche Bank” which appeared in the 16 January 2017 edition of your newspaper.

The said article cites Deutsche Bank as saying that “a peso under pressure from a potential double-deficit in
the fiscal and current account balances are prompts that the central bank could not afford to ignore against the backdrop of rising inflation and domestic demand… Thus, the Bangko Sentral ng Pilipinas (BSP) would have no choice but to adjust its policy tools, particularly benchmark interest rates.”

We clarify that managing inflation is the BSP’s prime consideration in setting monetary policy. Our latest baseline forecasts show that average inflation is likely to settle comfortably within target for 2017 and 2018. For as long as there is no credible threat to this inflation outlook, the BSP has the flexibility to keep its monetary policy settings even with short-term volatility in the exchange rate and the current account balance.

At the same time, the weakening of the peso is in line with the general trend among emerging market currencies, given the ongoing normalization of monetary policy in the United States. It would also be useful to know that the impact of exchange rate fluctuations on domestic inflation in the Philippines has actually declined in recent years. This is also supported by Deutsche’s Bank’s own finding, as cited in the article, that the impact of the foreign exchange rate on inflation “is not statistically significant.”


Without discounting the possibility of a deterioration in the current account in the future, the BSP believes that the current macroeconomic conditions and the Philippines’ economic fundamentals remain intact. In particular, we note that the country’s gross international reserves remain adequate at US$80.692 billion as of end-December 2016, supported by inflows from overseas remittances, business process outsourcing receipts, and foreign direct investments. Moreover, the observed narrowing of the current account surplus is driven in large part by the robust growth of imports of capital goods, intermediate goods, and raw materials. These items are indicative of sustained strong investment and production activities.

Pressure on the current account is also expected from the decision of the National Government to accelerate infrastructure spending to 5.1 percent of gross domestic product (GDP) and raise the budget deficit ceiling to 3.0 percent of GDP in 2017. While greater public spending may influence the peso’s movements, this move is also expected to raise the economy’s potential capacity and thereby help ease inflationary pressures in the longer run.

At the moment, therefore, the BSP sees no compelling reason to adjust its monetary policy settings in response to the weaker peso. Consistent with the country’s floating exchange rate regime, the BSP acts on exchange rate movements only to the extent that these movements may threaten the inflation outlook or become potentially destabilizing to financial market conditions. At any rate, in the case of excessive exchange rate volatility, the BSP may consider employing a wider set of measures, including macroprudential policies, in lieu of adjustments to its monetary policy settings to help ensure orderly market conditions.

The BSP maintains its assessment that inflation remains manageable as it gradually moves to average within the target range in 2017-2018 even as it continues to pay close attention to domestic and external developments. This is necessary to ensure the attainment of price and financial stability conducive to sustained economic growth.

Yours sincerely,
Diwa C. Guinigundo
Deputy Governor

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