BSP revises forex assumption to P42-P45:$1

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) sees the peso strengthening further, revising its foreign exchange rate assumption to a range of P42 to P45 to $1 due to the continued appreciation of the local currency against the greenback.

BSP Deputy Governor Diwa Guinigundo said the central bank used the revised peso-dollar exchange rate assumption in the computation of the new inflation forecasts for 2011 and 2012.

Guinigundo said the revised foreign exchange rate assumption was stronger than the previous assumption of P45 to P47 per $1 used by the Cabinet-level Development Budget Coordination Committee (DBCC) over the past few years.

The peso strengthened by 5.3 percent to close at P43.885 to $1 in end-December 2010 from P46.356 to $1 in end-December 2009.

The peso has continued to strengthen on the back of the robust foreign exchange inflows from higher remittances from overseas Filipinos, export earnings, tourism receipts, foreign portfolio investments as well as the general weakness of the dollar amid the fragile recovery of the US economy.

Just the other day, the Monetary Board in its first policy meeting this year agreed to raise its inflation forecast to 4.4 percent instead of 3.6 percent this year and to 3.5 percent instead of three percent next year. Despite the increase, the projected inflation would still fall within the target of three percent to five percent between 2011 and 2014.

Monetary authorities believe that the balance of risks to the inflation outlook has tilted further to the upside with more risks expected in the near future. These include food supply shocks coming from higher global food prices, the possible increase in domestic rice prices, the potential impact of weather disturbances on agricultural output, higher global oil price, and pending petitions for electricity rate increases.

Demand-side pressures could develop in the near future as actual domestic output continued to expand above historical trend.

Inflation kicked up to a four-month high of 3.5 percent in January from three percent in December. Consumer prices averaged 3.8 percent in 2010 from 3.2 percent in 2009.

Guinigundo said factors considered in the higher inflation forecasts for this year and next year include the transport fare hike, the wage adjustment for government workers, higher water rates as well as higher price of sugar and wheat.

“Additional information were considered by the Monetary Board. We need to be pre-emptive we won’t wait until it breaches the target,” Guinigundo stressed.

Additional information include the P1 hike in jeepney fares, P6 increase in the fare of airconditioned buses and P5 for ordinary buses, the additional P10 flagdown rate for taxis, the 10 percent increase in the salaries of government workers starting July, the 11 percent hike in water rates, the 10 percent rise in wheat prices this year, and the double-digit increase in sugar prices.

Despite the revised inflation forecast, the Monetary Board decided to keep key interest rates at record lows for the 14th consecutive policy-setting meetings since July 2009.

BSP Governor Amando Tetangco Jr. told reporters on Thursday that the Monetary Board decided to keep its overnight borrowing rate at a record low of four percent and the overnight lending rate at sixpercent as the prevailing price and output suggest that the stance of monetary policy continues to be appropriate for the time being.

The central bank body slashed its key policy rates by 200 basis points between December 2008 to July 2009 to cushion the impact of the global financial crisis on the domestic economy. –Lawrence Agcaoili (The Philippine Star)