While the Philippine central bank generally prefers to stick with a market-determined exchange rate, it could step in to control volatility before it completely runs away from the bank, says its governor Felipe Medalla.
“What I am afraid of is if we let it go, it may be harder to stop it [the peso’s slide], so you have to come in and reduce the volatility,” Medalla stated, speaking during the 17th Philippine Summit, organized by The Asset Events+ in Manila on Monday October 24 in partnership with BDO Unibank, SM Investments Corp, UnionBank of the Philippines, and China Bank and Chinabank Capital.
Fortunately, the Philippines “accumulated a lot of surplus” during the time of previous governor Amado Tetangco Jr, he added, which the bank could use to support the peso if needed.
During Medalla’s one-on-one with The Asset’s editor-in-chief Daniel Yu, the central banker revealed that the International Monetary Fund (IMF) considered the Philippines’ reserves as “twice more than necessary”.
However, Medalla added, he and other central bankers in the region disagreed, arguing that if they followed the IMF’s advice to “let the exchange rate go”, it would mean exposing the bank to potential political meddling. “You don’t know the politics of the situation. If you allow too much change, you are inviting political intervention.”
At the same forum, the governor also mentioned that the bank was in talks with some of the “bigger countries” in the Association of Southeast Asian Nations (Asean) to create a stability fund. “We have an agreement among Asean central banks to pool a certain percentage of our resources, which everyone can access during crises.”
Speaking with reporters after the summit, Medalla also noted that the bank might increase its policy rate by more than 100 basis points before the end of the year. He noted that the US Federal Reserve would almost certainly raise its interest rates by 75bp in its next policy meeting, a rate hike which Medalla, as a member of the seven-man monetary board, would vote to match.
“It could be more [than 100bp]. It depends on what the US does,” Medalla states, contrary to his previous position that there was no need to match the Fed “point by point”.
At the same summit, finance secretary Benjamin Diokno said interest rates should rise by at least another 100bp before year-end. Diokno, a former central banker before being appointed to the finance post, also emphasized that the executive branch of government, which he represents on the monetary board, will respect the independence of the central bank when it comes to monetary policy.
To date, the bank, which has two more policy meetings before year-end, has raised key policy rates by 225bp in 2022 in a bid to fight rising consumer prices and as a response to the peso’s current weakness. Since the beginning of 2022, the peso/US dollar exchange rate has gone up by approximately 8 pesos or 15%.
