FX intervention is a necessary yet short-term measure

IMF: Forex intervention crucial in price stability
By John Doe, Staff Writer

The International Monetary Fund (IMF) emphasized the importance of foreign exchange (FX) intervention as a necessary policy tool for price stability, according to the Bangko Sentral ng Pilipinas (BSP). However, the IMF cautioned that FX intervention should only be a temporary measure, and not a substitute for warranted macroeconomic policy adjustments.

The IMF’s December 2023 IMF Country Report, based on its Article IV Consultation in November, echoed similar sentiments from its 2022 report. It highlighted the effectiveness of BSP’s flexible exchange rate policy as a shock absorber, and how foreign exchange interventions help manage inflation and ease pressures on monetary policy.

The IMF stressed the need to keep markets liquid, maintain a flexible and market-driven exchange rate, and ensure that the monetary policy stance remains adequate to address inflation risks. It acknowledged that, given the Philippines’ shallow FX markets, the use of FX intervention may be appropriate under certain circumstances.

BSP’s key policy rate is its main policy instrument, with the IMF considering other policy levers to play a secondary role. While the BSP has emphasized that any foreign exchange interventions are aimed at ensuring orderly market conditions, the IMF noted that the central bank’s reserves declined mostly because of FX interventions, with a peso hitting an all-time low of P59 versus the US dollar in October 2022.

Despite BSP’s efforts to stabilize the peso-US dollar rate, current inflation rates are well above the target range of two to four percent, prompting BSP Governor Eli M. Remolona Jr. to consider maintaining the benchmark rate and cautious about reducing the key rate.

As for the peso, Remolona said he is “somewhat comfortable” at the current level, but remains focused on potential sharp movements and levels of uncertainty affecting the exchange rate.

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