The central bank has once again called for reforms in its charter, saying monetary authorities need additional powers to counter the current and potential future volatility in the country’s financial markets.
In its report on economic developments released at the weekend, the Bangko Sentral ng Pilipinas (BSP) noted that capital flows, either going into or leaving the country, remained one of the major risks that the Philippines’ otherwise-strong economy faces in the coming months.
Last week, local share prices crashed and the peso hit its lowest point in over a year.
This came after the US Federal Reserve’s signal to end its aggressive monetary stimulus, alongside jitters over China’s economic slowdown, illustrating the country’s vulnerability to sudden external shocks.
Should the volatility markets continue, the BSP said it needs extra tools and resources to combat the effects of capital flows on inflation, share prices, foreign exchange and economic growth.
“Guarding against destabilizing financial market imbalances arising from capital inflow surges imposes a cost on the BSP,” the report read
Proposed amendments to the BSP charter, which needs congressional approval, include:
increasing the BSP’s authorized capital from P50 billion to a higher level commensurate with the expansion in the size of the economy and the financial system;
setting up of a formal arrangement on the sharing of gains and losses by the national government and the BSP;
restoring the BSP’s ability to issue its own debt securities to enable it to siphon excess money supply from circulation;
allowing the BSP to set up reserves to absorb losses from foreign exchange fluctuations; and
granting of tax exemption to the BSP.
Foreign capital, mostly in the form of foreign portfolio investments or “hot money,” has been entering the emerging markets like the Philippines since last year amid the weakness in developed economies.
“Against this backdrop, the BSP stands ready to employ, from its menu of policy instruments, measures that will help ensure that the benefits of capital flows are maximized while warding off the potential destabilizing impact of volatile capital flows on price and financial stability,” the BSP report read.
So far this year, the BSP has kept its key overnight borrowing and lending rates at record lows of 3.5 percent and 5.5 percent, respectively.
Rates for special deposit accounts (SDAs) have also been slashed to 2.5 percent across all tenors, as well as restricted the access of retail depositors to the BSP facility.
“The reduction in the SDA rates is consistent with the BSP’s efforts to fine-tune the operations of its monetary policy tools to enhance their effectiveness in promoting price and financial stability,” the BSP said.