The International Monetary Fund expects the peso to become a shock absorber with the shifting monetary policy of the US Federal Reserve and the Bangko Sentral ng Pilipinas.
“The exchange rate should continue to play its role as a shock absorber, while foreign exchange intervention [FXI] may be appropriate under certain circumstances,” the IMF said in its latest country report for the Philippines.
The peso closed at 57.84 against the US dollar on Dec. 27, 2024, down by 4.4 percent from 55.37 on Dec. 29, 2023.
“Shifting expectations regarding future policy rates in the US have raised peso volatility. The BSP has been appropriately focusing on domestic price stability, allowing the exchange rate to play its role as a shock absorber, and should continue to do so,” the IMF said.
It said given the Philippines’ shallow FX markets—the most relevant IPF friction—and the nonlinear impact of exchange rate fluctuations on inflation expectations, FX intervention could play a role in mitigating risks associated with abrupt exchange rate movements.
“Nevertheless, deployment of FXI should only be temporary and not a substitute for warranted macroeconomic policy adjustments,” the IMF said.
It said that in considering the optimal response to periods of stress and elevated uncovered interest rate parity (UIP) premia, the BSP should remain cognizant of tradeoffs between using FX intervention and domestic foreign exchange market deepening.
