BSP to ‘take strong immediate action’ vs. inflation

This was stressed by BSP Governor Nestor A. Espenilla Jr. on Friday, as markets continued to be affected by the surge in the rate of price increases to a multiyear high of 6.4 percent in August 2018. (Photo: Bangko Sentral ng Pilipinas/Facebook)

MANILA — The Bangko Sentral ng Pilipinas (BSP) has affirmed its readiness to “take strong immediate action using the full range of instruments in its toolkit” to address threats generated by higher-than-expected inflation, as demonstrated by its 100 basis points increase in key rates earlier this year.

This was stressed by BSP Governor Nestor A. Espenilla Jr. on Friday, as markets continued to be affected by the surge in the rate of price increases to a multiyear high of 6.4 percent in August 2018.

“The follow-through actions will also address other threats to higher inflation, such as excessive exchange rate volatility not consistent with underlying macroeconomic fundamentals in order to ensure that inflation returns to its 2 (percent) to 4 percent target over the policy horizon,” he said in a message to reporters.

He also said that the central bank will re-activate tolls like the Currency Risk Protection Program (CRPP), “which will be made available to eligible corporates with foreign exchange obligations based on more liberalized rules.”

“In addition, the BSP will take all actions necessary to deal with speculative activity by market participants,” he added.

On Friday, the central bank, in a statement, said it will re-activate the CRPP, which was introduced in December 1997, to be made available to eligible corporations through commercial banks. It was explained that the facility is a “non-deliverable forward hedging facility, which is aimed at alleviating demand pressures in the foreign exchange spot market from borrowers seeking to hedge their future foreign exchange exposures.”

“Under the facility, parties agree that, on maturity of the forward contract, only the net difference between the contracted forward rate and the spot rate shall be settled in pesos,” the central bank said.

BSP Deputy Governor Diwa Guinigundo, in a briefing Friday, said the facility will address concerns of corporates with outstanding loans. He explained that businesses normally buy foreign exchange on spot for their future requirements.

While this practice protects corporates if the Peso, for one, depreciates in the future, this increases volatility in the foreign exchange market, he said. “But if you have this CRPP, then your corporate players will have the assurance that they will be protected regardless of the fluctuations in the foreign exchange market,” he said.

Guinigundo stressed that the current volatility in the foreign exchange market is due to the impact of external developments, such as the trade tensions between the US and China and the currency crisis in Turkey and Argentina. “So I think by these measures of the BSP, the announced measures of the BSP, we should be able to address the concerns of the foreign exchange market,” he said.

“The BSP will make sure that we would also be able to deal with speculative activity in the market,” he added.