Regulator to allow peso to depreciate further

The Bangko Sentral ng Pilipinas will allow the peso to depreciate further this year, as dictated by market forces, stressing that a hands-off policy on the exchange rate is good for the economy.

In one of its latest publications, the central bank said it would keep its policy of allowing the exchange rate to be determined by actual, rather than artificial, demand and supply conditions in the market.

But the BSP also said it would intervene, particularly by buying and/or selling currencies in the market, whenever the peso turns volatile.

“The BSP will continue to adhere to a market-determined exchange rate policy. This implies that the BSP will not set out to reverse the underlying trend of the peso, but only to smooth out volatility in the exchange rate,” the monetary authority said in its quarterly report on economic and financial developments.

Currency traders noted that the peso started to weaken in 2013, and the trend could continue through 2014. The peso closed at 44.395 against the US dollar on the last trading day of 2013, depreciating by about 8 percent from 41.05 reported the previous year.

The downtrend of the peso in 2013 marked a reversal seen in 2012, when it became one of the fastest appreciating currencies against the US dollar.

The peso’s depreciation came about just as the US Federal Reserve mulled over the gradual withdrawal of stimulus funds injected into the US economy. Part of the funds spilled over to emerging markets, like the Philippines, in the form of portfolio investments. The US Fed’s “tapering” decision would lead to a withdrawal of securities investments from emerging markets.

Meantime, the depreciation of the peso, which makes imported goods more expensive, will add pressure on domestic prices.

The country is already being threatened by rising oil and energy prices.

But the BSP expressed confidence that inflation would remain within the official target range of 3 to 5 percent this year. Officials said favorable supply conditions and improving production capacity of the country’s manufacturing sector would help keep inflation manageable.