BSP beefs up insurance fund for FX fluctuations
The Bangko Sentral ng Pilipinas (BSP) has increased the ceiling on its Reserve for Currency Insurance Fund (RCIP) from P3 billion to P6 billion.
The RCIP, an internally managed fund, is part of BSP’s capital surplus/reserves. As of end-March, reserves amounted to P48.51 billion, lower than same time in 2021 of P76.30 billion. At the start of the year, capital reserves was high at P91 billion.
The currency insurance fund is one of BSP’s self-insurance scheme for any potential losses from its currency and gold hoard. Annual transfers to the reserve account are made from the surplus account and are invested in government securities.
Last year, the BSP tweaked its reserve provisioning for the price fluctuations of foreign securities and has decided this will be computed on a yearly basis to cushion or mitigate the risk of incurring losses due to FX fluctuations and changes in the prices of gold. Prior to 2021, reserve provisioning was computed on a quarterly period.
The BSP has likewise decided to double the maximum ceiling of the RCIP to P6 billion. The additional P3 billion for RCIP provisioning came from the capital reserves in 2020.
Meanwhile, as of end-March this year, the BSP’s reserves for fluctuation in FX rates is also P6 billion for any potential loss arising from the volatility of the exchange rates and price of gold. This amount is the net realized gains from FX rates fluctuations.
To stop market play on the peso which has fallen to 17-year lows in June and July, the BSP has signalled its readiness to adopt a more hawkish monetary policy stance to prevent the disanchoring of inflation expectations and temper exchange rate volatility.
The BSP has raised the policy rate by 125 basis points so far and central bank officials have hinted that the current 3.25 percent benchmark borrowing rate may still get adjusted when the Monetary Board meets on Aug. 18 for its next policy setting.
Increasing benchmark rates is an effective way to temper exchange rate volatility since sustained pressures on the peso may have already worsen inflation expectations.
For the first six months, inflation rate averaged at 4.4 percent, above the target of two percent to four percent for 2022 until 2024. Private sector economists polled by the BSP forecasts inflation to hit 5.4 percent this year and 4.4 percent in 2023, higher than BSP’s own projection of five percent for 2022 and 4.2 percent next year. This is evidence of further spillovers into inflation expectations.
Over the past four weeks, the exchange rate volatility has introduced a new element in the inflation equation even though monetary policy under the inflation targeting framework does not normally respond to exchange rate movements.
The BSP has been closely monitoring recent fluctuations in the peso-US dollar transactions and the potential price pressures from excessive exchange rate volatility.
The peso hit P56 to the US dollar in early July. Since the start of 2022, the peso has depreciated by P5.37 or 10.53 percent from its end-2021 close of P50.99.
Exchange rate movements can affect actual inflation as well as expectations about future price movements. Changes in the exchange rate tend to directly affect domestic prices of imported goods and services.
The BSP has a freely floating exchange rate system which means it is market-determined and the BSP’s participation in the exchange rate market is limited in that it can only interfere during times of excessive movements.